In life, it’s always smart to have goals. If you want to get ahead financially, having well laid out plans for your goals is half the battle. These goals can help you achieve financial independence. But it’s sometimes difficult to save for multiple goals. One little secret to achieving your goals is to have separate financial accounts for each goal. However, for myself, I use a bit of a hybrid approach.
If you’re like most people, saving for a rainy day is a chore. Putting aside money for an emergency fund, a retirement fund, or any other goal takes dedication. You have to initially identify what’s really important to you – if you first identify the significance of these various goals in your life, the way forward will be easier. Then saving for many goals at once will be less demanding. Fortunately, there are easy ways to start accomplishing these tasks so that over time you’ll be impressed and encouraged by your success.
1. Separate Accounts
One of the more popular methods today is opening up separate savings accounts for each major goal that you have. For instance, if you have semi-regular expenses for home and auto you could open up an account dedicated to just those expenses. You then just figure out how much per month you will need to contribute so that it slowly grows over time. Try to keep this account always funded even as you occasionally withdraw for needed expenses.
Obviously, the benefit is that you will have cash handy when you need it for those expensive auto and home fixes. If you estimate your annual home repairs to be about $2,000 per year and auto being upwards of $1,000 per year then contributing at least $250 per month will help fund those expenses.
I’ve done this with Christmas club accounts in the past. Long ago my bank actually had this account option and it taught me early on the value of saving in separate accounts. At the time I put in $50 bucks a month and in November they dumped it all back into my account. This “felt” like a $600 bonus for Christmas! Although I knew it was being moved from my checking to this alternate account, it wasn’t painful and it was a nice surprise come November (they’ve since gotten rid of this account and $50 a month is not what it used to be!).
But you get the point. You can have a separate account for short-term savings, one for long-term savings, one to save on buying your first home, one for travel, and one for general emergencies. Definitely consider the benefits of having smaller, separate accounts.
2. Make It Automatic
This is one of the true keys to success. If you have to remember to deposit money into this account each and every month I believe you’re setting yourself up for failure. With all of the demands of daily life, we’re generally so busy that remembering to do this easily slips our minds. But today most everything can be automated.
We’re able to automate deposits from our paycheck. We’re also able to automate bill payments. So take these wonderful tools and begin to automate withdrawals from your checking into a savings (or multiple) accounts!
Even a little bit of money each month will really add up. You’ll be surprised at how effective this strategy really is!
3. Pick A High-Yield Account
If you look around you should be able to find a few offers for a higher interest accounts. Most savings accounts at your local bank often only have very minimal interest yields. However, if you explore a few online options you can sometimes find those that offer a higher interest rate; some have even offered upwards of 2% at certain times. Now, read the fine print here. Some will not offer a higher yield until your account reaches a certain balance, sometimes in the thousands of dollars.
If this is the case and you’re trying to qualify for the higher interest accounts, you may have to combine a few of your separate goals (mentioned above) into one larger account to accrue the higher yield. These funds are great when you’re expecting on letting that money sit there for a long time (hopefully this is the case for all of our savings accounts).
4. A Hybrid Approach – A Bit Of The Old & New
Old-School
My approach is a bit old and new-school. This is more the traditional approach and it is my longer-term savings account. This is my main emergency fund. And of course, as we all know, it’s important to have at least 3 months of living expenses in this account. A lot of experts state you should have 6+ months here and I tend to agree with them. And as we all know, the year 2020 has taught us the importance of an emergency account! A lot of people suddenly lost their jobs in this covid world. So it’s essential you have this account!
This account comprises all of my main savings goals. I try to get the maximum interest rate that I can in this account. These are generally money market accounts through your bank or online options. The goal here is to keep 3-6 months of living expenses: my survival money to live another day. Beyond this, you can also start adding things like your auto and your home savings, etc to this account (or it might be better to just keep these separate if you choose).
Some may argue that you shouldn’t keep your auto and home expenses as part of this emergency savings. But I feel that if you have 6 months of living expenses saved up, the excess can still to be used for “emergencies” of which auto and home may qualify. Lose your job? This is the account you use. Need a new roof? This is the account for it. The car breaks down and you have to get it fixed to go to work? This is the fund for it versus dipping into the credit cards. But you have to work hard to build this one up. You still have to have good budgeting skills as well to maintain it. And it’s important to replace it if you have to withdraw from it. It’s also important to do fund this before you fund any smaller, fun accounts you may have that we’ll talk about later. Remember, this is your survival money!
If you do use this fund for more than just one purpose, it’s important to keep the money separated within that one fund. Meaning, get your 3-6 months of emergency savings built up first. Then allocate the rest for different uses as you see fit. This is where a spreadsheet works great. I have then purposefully separate and keep track of these funds. I often do it manually but otherwise, I use an excel spreadsheet to help me.
I like this method because I like a bit of the old-school techniques: it forces me to look at these accounts at least monthly. I am more involved as well since it’s more manual. For me, that gives me more control over my money, more input if you will. This approach isn’t for everyone since there are a lot of great online tools available even for this type of account, but it works for me.
New-School
I also have a couple of smaller accounts that I deposit other money into on a regular basis. This, however, is not my traditional emergency savings account. I’m not intending to save a large amount here. In this one, I utilize modern apps and programs to manage the money. This gives me the ease to frequently review the accounts and the flexibility to move money around where needed.
This account is solely for very short term use. It’s for my unexpected little expenses that crop up. It’s my “want” account. This account satisfies those wants that we all have. I keep this account small on purpose so as to not overspend. It helps prevent me from dipping into longer-term savings that we all have a desire to do from time to time. Sometimes this fund is used up one month. But in another month, my wants are well controlled and this account builds up. This account satisfies those desires in life – it keeps life fun and allows wiggle room in the budget.
Another shorter-term account is for the bigger, essential expenses that pop up such as when the electricity bill is a little higher this winter than what I accounted for. This is my “cushion account”. Again, I keep this away from my checking so I don’t necessarily spend it. And I utilize modern apps to keep track and move money around where needed. It forces me to make conscious decisions about the use of my money.
It’s used for the kids’ clothes that were beyond what I budgeted but I have the money for. I’m not expecting to grow this account: rather, it’s my “medium expenses” account. I do keep it separate from my checking (and from my two other savings accounts) – I do this for a reason: if it’s in my checking I’ll tend to just spend it. If I have to purposefully move this money over electronically to my checking, I’m making a conscious decision to do so. It allows me to think a bit before the purchase which is important.
Although it’s a little bit excessive having these three accounts, it prioritizes the money. It forces them into purposeful routes. For myself, it works better than just one overall account because it gives the cash meaning: there is short-term pleasure, medium-term cushion account, and a longer-term emergency account.
I also didn’t just start out with three accounts. It evolved over time and I was able to start funding them with raises I received each year from my employer. I just had to dedicate that raise to a specific purpose. However, the rewards are great because it keeps me focused on my spending habits.
5. Invested Approach
Then there is my loonng term money. Meaning, I don’t plan to touch this at all if possible. It is my emergency, emergency fund. When my emergency fund runs out, this is the money I tap if needed because things really got bad. And to clarify, no, this is not my 401(k), 403(b) or another retirement plan. It’s still a way to save for goals and emergencies.
In this approach, I try to maximize my interest rate because I don’t want my money just sitting around even in a high-yield account. My plan is for a safe but decent return. I personally do this with ETFs mixed with bonds.
Many people can also do this with bond stacking or buying various length CDs so they are always maturing at regular intervals. The danger of this approach (and I’m not encouraging you to do this at all) is that money may be harder to get to when you need it. You can also lose money.
Many may consider this not a savings account at all. And that’s fine. It definitely isn’t the traditional savings account. It’s not meant to be. It swings more into “investing”. But it’s still a way to save and grow your money. In this case I’m not necessarily looking at trying to match the S&P500, but rather get solid, consistent returns that outdo normal high-yield accounts. And it’s money “above” the threshold of a normal emergency fund. Meaning, it’s beyond my emergency savings accounts.
For myself, I enjoy using longer-term stock indicators which determine if we’re in a bull or bear market. I invest only if we’re in the former and pull to cash in the later. Again, there is always a risk of losing money and you WILL have drawdowns with this approach. The other method is a strength rotational strategy. I use both stocks and ETFs.
The methods I use are more complex than what this article was intended for so I won’t go into details here. As you grow as a saver and investor you may develop your own strategy. The point is that it’s important to keep many months’ worth of living expenses in a safe, guaranteed high-yield account.
Summary
All of these five ways enable you to prioritize and save for multiple goals in your life. You’ll build funds for not only fun desires and “wants” but you’ll build a solid emergency fund that has many layers. Some might call it excessive, but I like the comfort and safety it brings. It forces me to look at my money as short-term and longer-term uses. And I certainly didn’t fund these accounts overnight. They were added, layer upon layer.
Although my technique requires a more hands-on approach, it works for me. And I’m certainly not recommending my strategy for anyone else. However, it’s an option to consider in developing your own strategy to save for multiple goals. I enjoy reviewing my accounts periodically and this forces me to do so. I also enjoy having multiple strategies. Overall I believe it keeps me involved and proactive.
The easier (and more interesting) you keep this, the more involved you’ll be with your money. And that’s the true secret: be involved, be proactive, and let your money work for you.
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