Some people start saving young, when their mom or dad takes them to the bank to open their first account with the contents of their piggy bank. This is a good foundation for a life of fiscal responsibility, but it isn’t always enough.
Especially with interest rates what they are today, no child — and no adult either, for that matter — is going to be impressed watching their savings grow in a traditional bank account. What is more satisfying is planning to add a predetermined amount to a savings account each week or month and watch the money grow this way.
How much to add and how often can be difficult to determine, however, and even more difficult to follow through with.
Goals for Multiple Savings Accounts
Your first step should be identifying your goals. What do you want to save money for?
At its most basic level, our desire to save money should serve our need for security. We may not have any particular item we are saving up for, but we want to be prepared in case of an emergency. What if we get sick and can’t work for a period of time, or what if we lose our job? Wells Fargo recommends a cushion that can pay for at least three months’ worth of expenses, and some other sources recommend an even bigger emergency fund.
CNBC, quoting a GoBankingRates survey, says 57 percent of Americans have less than $1,000 in their savings accounts. But, the survey says, 39 percent of Americans do not have any cushion at all, living paycheck to paycheck. Often, these people are caught in cycles of debt and poverty, earning little and spending little. But for others, it’s a matter of poor fiscal choices.
What Is Your Savings Account For?
If you make enough money to cover your basic expenses each month, it’s a good idea to earmark some for savings. But what do you want to save up for?
You may have your eye on a new flat-screen TV or a pair of Pradas, but your needs will be better served if you make your future your first priority.
Young families, in particular, have many challenges and even more needs. Kids are expensive and are constantly outgrowing their clothes and shoes. As if this weren’t enough, you may need to shell out for new winter coats and boots every year, as well as extracurricular gear like soccer cleats, tap shoes, gymnastics leotards and ice skates. It can really add up.
But don’t let the here and now take over entirely. Responsible adults plan carefully and construct secure safety nets.
Once you have three to six months’ worth of expenses in your savings account, you can start thinking about laying the foundation for support in other areas of your family’s life.
College Savings Accounts
For instance, do you have college savings account for your kids? This expense is upon you more quickly than you think, and the longer you wait to start saving, the less of an impact your dollars will have.
U.S. News and World Report say the cost of tuition at a private college has risen 157 percent in the last 20 years, and 197 percent at public universities. In-state tuition and fees are up 237 percent. Although politicians have talked about reining in the escalating costs of an education in the United States, thus far no action has been taken. No one wants to rely on Congress for their family’s future, so take this into your own hands.
One of the most popular ways to save for college is through a 529 plan. With this type of savings account, you can add money once a week, once a month or once at the end of the year.
For some people, setting aside a certain amount every week — even if it’s only $20 — works best. Otherwise, they may spend the money frivolously on foamy cups of coffee or movie tickets. For others, however, once a year works best. If you run your own business, for instance, and want to see what your yearly profit will be, or if you are expecting an extraordinary expense like having to buy a new car, you may want to wait until the last minute to judge your financial position.
The stipulation with a 529 account, however, is that it be used for education by the person named by the account holder. It is sometimes possible to transfer the money to pay for the education of another family member without penalty, but if you withdraw the money for any other purpose, you will likely be faced with paying a substantial fee.
This can be helpful to people who fear that without the threat of a penalty, they may simply withdraw the money whenever they want something, just as they would with an ordinary savings account. However, for the family who is living closer to the edge financially and doesn’t have an adequate emergency fund, tying up their money in an account like this might not be a good idea.
Savings Accounts for Retirement
Even though young families often worry about expenses like daycare and payments on the minivan, they should not put off the idea of saving for retirement. You may think you can’t afford to save for retirement, but really, you can’t afford not to.
The easiest and best way to save for retirement is through your employer’s 401(k) program. Your employer’s match is like free money. Even if your employer doesn’t offer a match, the ease with which you can contribute and the variety of investment choices make 401(k)s popular plans.
Once you have accounts set up for the big expenses like education and retirement, you may choose to start earmarking funds for your other wants.
Multiple Savings Accounts for All Your Goals
Discover recommends setting up multiple savings accounts, delineating each one for a particular purpose. If you have one savings account in which you keep money for emergencies, vacations, Christmas gifts and more, it can be hard to tell at a glance if all is well.
For instance, if your emergency fund is $30,000 and your bank account balance is $52,000, how much of that is for vacations, how much is for gifts and how much can you spend fixing up the guest bedroom before your mother-in-law arrives for a visit? You’d have to do the math every time you want to spend money.
If you set up different accounts, you’ll know immediately how much you have in each. By setting goals, you’ll know how much disposable income you have and how much more you need to reach your target.
It’s similar to time management. You may think you have plenty of time to get your work done, so you take a long lunch, check your personal email and chat with co-workers, only to find yourself having to stay late at the office to make up for your mistakes.
Careful planning helps mitigate surprises. You may like to think of yourself as the spontaneous type, but you probably don’t want to be forced to use that impromptu aspect of your personality because you ran out of money.