Why You Need Two Savings Accounts

A very common New Year’s resolution is to save more money.  That’s a worthy goal, but I recommend that you maintain two savings accounts—an “If” savings account and a near-term “When” savings account.

“If” savings is your emergency fund.  It’s for all of life’s if’s—if you incur significant medical or house repair expenses that are not covered by insurance, and mostly if you lose your job.  I used to believe that having three to six months’ worth of essential living expenses in such an account was the right target.  I now believe we should all have six months’ worth.  The recession has shown me just had bad things can get, with the average unemployed person remaining out of work for about six months.

The other type of savings account, near-term “When” savings, is for items you spend money on every year but not necessarily every month—when the semi-annual property tax bill comes due, when your annual life insurance bill arrives, when you take a vacation, etc.  Take the annual total of all such items, divide by 12, and automatically transfer that amount from your checking account to a separate savings account each month.  When the bill comes due, just transfer the amount back into your checking account and make the payment from there.

Some people go even further, with separate savings accounts for each item—one account for vacations, another for property taxes. However, my wife and I find that maintaining one savings account for our emergency fund and one account for all periodic expenses works well.

There isn’t a one-size-fits all approach to deciding what to save for in your near-term “When” savings account.  We don’t use our account to save for gifts, home maintenance, or vehicle maintenance, for example.  We just let our monthly budgeted amounts for such items build up in our checking account.  But we do use our separate near-term “When” savings account to save for our property taxes, life, home, and vehicle insurance premiums, and vacations.

If you don’t have a separate savings account for periodic expenses and bills, I recommend that you open one as soon as possible.  It’s a relatively simple step toward building a well-oiled financial machine in 2010.

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5 Responses to Why You Need Two Savings Accounts

  1. Kari August 24, 2012 at 1:42 PM #

    Hi Matt,
    Thanks for this. I already have one at the same bank as my checking but it has very low interest (0.01%). I am considering opening another for long term savings with Ally who has a much a higher interest rate. Ally has no maintenance fee and the reviews seem positive, but I’m one of those “if it seems too good to be true it probably is” kind of people. I was wondering if you have any experience/opinion on this bank? Am I better off just sticking to a low interest bank even though I do not plan on withdrawing frequently?

    Thank you in advance for your time and help!

  2. Top Savings Accounts September 9, 2011 at 11:46 PM #

    We just let our monthly budgeted amounts for such items build up in our checking account. But we do use our separate near-term “When” savings account to save for our property taxes, life, home, and vehicle insurance premiums, and vacations.
    ________________
    Steven

  3. Matt Bell January 7, 2010 at 3:04 PM #

    Great point, Jesse. I’m all about saving a step whenever possible. Thanks.

  4. Jesse January 6, 2010 at 3:46 PM #

    You can use a money market account with check writing privileges as your savings account and save the “transfer back to checking” step. The typical check writing limits (# checks and minimum amount) are probably quite workable for this purpose. Some may need electronic billpay from their checking account though, so depends on your situation.

  5. Sam January 4, 2010 at 5:54 PM #

    Matt, good point about needing two savings accounts! I completely agree with this! I like having multiple savings accounts to get my money organized.

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