Over the years, the term emergency fund has become a catchall for all things savings-related, but according to Bankrate, you shouldn’t have just one savings account. Having multiple accounts allows you to target your savings for your financial goals and when accounts are earmarked for specific goals, you are far less likely to raid them for miscellaneous reasons. Here are four types of savings accounts you should definitely have in your banking arsenal.
Emergency Fund — 3 months’ worth of expenses or $5,000
The word emergency is such a misnomer. I like to call this the unexpected expense fund. It’s the dental bill you get hit with after your insurance swore they would pay, it’s not necessarily an emergency, but it isn’t a bill you should ignore either. This account should have three months of living expenses in it or $5,000 whichever is greater. Anything greater than that isn’t an emergency or unexpected expense, it’s an event that requires a lifestyle adjustment.
Job Loss Fund — 6 months’ worth of expenses or $20,000
This is the do not touch under any circumstance fund! It’s liquid cash that you hold on to in case you are laid off, fired, or decide you need to quit. You can always increase it to nine or 12 months worth of expenses, but it should never be less than six months’ worth or $20,000 whichever is greater.
Short-Term Goals Fund
Annual vacations, holiday spending, new televisions, refrigerators or home down payments should be allotted for in this account. It’s money that you save for a specific purpose, empty when it’s time to purchase, and then build up again for the next short-term goal. It will see fluctuation and that’s OK; it’s typically money you plan to spend in one month to five years. The amount you save here is set by the costs of things you want to buy. You may even want to have multiple short-term goal accounts so that down payment money isn’t comingled with your annual vacation fund.
Long-Term Goals Fund
This is where you would include your 401(k), IRA, and any other long-term investment accounts. Typically, you don’t need this money for a minimum of 10 years. It’s best to have these accounts set up on automatic contributions so that they continue to grow year after year after year and you should assess their performance and growth annually.
How many savings accounts do you have? Do you think targeting your savings and separating the purpose of each account would help you better commit to your goals?