I’m guessing that most of us have a some day/one day list. Projects we’d like to get to if we could ever just find the time. Right now, with so many of us unable to do so many of the things we usually do, we actually do have the time to get to some of those projects. A good starting point is to get your savings accounts set up for maximum effectiveness
Don’t mingle your money
Step one for your savings is to open a separate savings account. What I’ve found is that if you consider some of the money in your checking account to be savings, that money leaks. I don’t know where it goes, but it disappears. It gets used for who knows what.
The most effective way to build savings is to have a separate, dedicated savings account. You could open an account at the bank or credit union where you have a checking account. Or, you may find a better interest rate at an online bank. The important thing is to open an account.
The first savings account
The first savings account to open is for emergencies. As we’re seeing today in dramatic fashion, life can change quickly. Many people who may have thought their jobs were secure are now out of work, and the loss of our income is one of the most severe financial emergencies any of us could experience.
I agree with the common advice to build and maintain an emergency fund that could cover three to six months’ worth of essential living expenses. Three months’ worth should be enough for someone who has relatively few breakable moving parts to their life, such as someone who is single, lives in an apartment, and has in-demand job skills and training. However, if you’re married, have some kids, and own a house, now you’ve got a lot more riding on your income. You need more in your emergency fund.
If you’re just getting started with an emergency fund, one of the best steps you could take is to set up a monthly automatic transfer from your checking account to this savings account. Even $50 per month would be a great start.
And if you get some money from the government as part of the $2 trillion CARES Act, use that to jump start your emergency fund. There’s a calculator in this article where you can see if you’re likely to receive some money.
Additional savings accounts
Once you have an emergency fund, the next step is to create periodic bills and expenses savings accounts. Saving for periodic bills and expenses only requires that you take certain monthly budgeted amounts and put that money into savings each month until the bill or expense needs to be paid.
Examples of periodic bills or expenses include a semi-annual vehicle insurance premium, an annual home insurance bill, Christmas gifts, vacations, and property taxes (if you pay that bill outside of your mortgage payment). One-twelfth of the annual cost of each such item should be part of your monthly budget, but because you don’t actually pay that amount each month, transfer it to a savings account. That way, when the bill or expense needs to be paid, the money will be readily available.
In our household, we used to use Capital One for this type of savings. Not only does the online bank pay a decent interest rate, but it allows for multiple accounts that you can name for each intended purpose. I really like that. When you go online to look at your balance, you can see how much is in your vacation fund, your vehicle insurance account, etc.
In an effort to simplify our financial lives, we recently closed that account and transferred all such savings to Vanguard where we have another account. This savings is now in a money market fund. We can’t separate it out into dedicated accounts for each purpose, so I use a spreadsheet to keep track of how much of the total is earmarked for each item.
Putting money into savings each month for periodic bills and expenses is one of the best money moves we’ve ever made.
Take it to heart: “In the house of the wise are stores of choice food and oil, but a foolish man devours all he has.” – Proverbs 21:20
Take action: If you don’t have a dedicated savings account, open one today. Bonus points if you set up a monthly automatic transfer from your checking account to this savings account.