Separate your savings

Photo courtesy of Will Deutsch

 

I once went to an ATM in a tourist area (Pearl Harbor to be specific). Finding an old receipt in the receipt slot, I removed it, buy being the nosy person that I am, I looked at it before throwing it away.

It was a withdrawal for a few hundred dollars, not unreasonable. But then I looked at the checking account balance: It was over $200,000.

And while I was certainly impressed, I couldn’t help but think to myself that they were doing it wrong.

Save like the wind

I can’t say enough good things about having savings. Savings is an insurance against the unexpected, a way to plan and be intentional with your money, and also one of the most potent anxiety-reducing mechanisms you’ll ever encounter.

But while having a big pile of savings is good (and certainly better than not having it), why would you keep it as one unspecified pile, or, worse, keep it lying around in your checking account? If you co-mingle your funds, you’re probably not thinking as deliberately about your savings and its purposes as you could.

The different kinds of savings

I distinguish savings into a few different categories. See which ones you have:

  • Float: The amount of money that gives you flexibility for payments in your monthly budget. I’ve written about float many times before.
  • Retirement: Whether or not you plan to stop working at some point in your life, there are savings plans set up that are so advantageous to you that you’d be unwise to avoid them. This money is illiquid which means that you can’t easily get at it, so it’s a “set and forget” process.
  • Emergency fund: I have yet to meet a credible source who doesn’t agree that 3-6 months of expenses in the bank is a good idea. This money is off limits except for emergencies. For everything else, there’s…
  • Personal savings: Personal savings is the “traditional” method of saving up for things over time. This is the category that I want to talk about today.

Why to have personal savings

Perhaps you think me obtuse for asking why to have personal savings, but you may not have really thought about it. If your first thought is “I just need lots of money saved in case something happens” then you have made an error, as you’re talking about an emergency fund, not personal savings. They are not the same thing.

You want to have personal savings for the following reasons:

  • For purchases that don’t quite fit into a monthly budget. For example, my web hosting service is coming due. Since I like to renew for a few years at a time, the cost is a few hundred dollars. I don’t have that kind of play in my budget, but I could split it up over two months or so. Having the money saved up in two chunks will keep my budget intact.
  • For long-term purchases. Are you planning on buying a house? A car? Unless your last name is Walton or Gates or Buffett, you probably can’t fit a purchase like that into your monthly (or even yearly) budget.

These two reasons are really just two sides of the same reason: if you can’t fit it into your budget, you need to save up for it. Otherwise, you’re going to have to go into debt. And the credit card companies don’t need your donation.

What is all this?

To make your savings work best for you, know what it is specifically allocated for.

Let’s say you have one savings account for everything. This means emergency fund, car, down payment, travel, whatever, it’s all in one place. How do you know how much you’ve saved up for each? Keeping savings commingled may cause you to feel like you have more than you actually do.

Let’s say that you have $50,000 in one big savings account. $50,000 is more than enough for a car, even if you buy new (which, as a rule, I don’t recommend). And $50,000 may be enough for a down payment (depending on where you live). But is it enough for both? You see the large number and it feels good, but if you break it down, it might not be what you think it is.

Of course, you could do the math in your head, but it’s too easy to make a mistake, especially where numbers and emotions intersect.

And it goes without saying that savings inside one’s checking account is a recipe for problems. Yes, you need float in your account, but your savings is not float. Don’t make your money multitask; give every dollar a single role.

Separate it

So I recommend everyone create a separate account for every major savings project you have. Instead of throwing “whatever money” at “whatever unspecified savings,” you will be deliberate with how much you put away, so you know how much you have saved for each.

Accounts are easy and almost always free to create. Online banks like Ally make this trivial and instantaneous. Your bank or credit union will offer this as well. Whenever I have a new project that I want to save for, I just open a new account for it. Easy.

Be flexible

Now, there’s no law stating that you can’t transfer money between accounts. Let’s say that a trip you take ends up being more expensive than you intended. You can transfer money from another account, but now you are doing it deliberately. You are saying, “my trip cost a bit more than expected, so I’m going to to prioritize that over my car fund.” That’s very different from just taking money from a big pile.

So while I hope (and expect) that eveyone here will eventually have $200,000 in some form, I hope it never is in your checking account. Separate it…and use it well.

But enough about me. Do you separate your savings?

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

I offer a free phone consultation to anyone who is interested in changing their financial narrative. Are you ready? Click here for details.
Mike Pumphrey
Posted on June 9, 2014
  • Tamara Roberson

    I’m trying to think of a good reason to have $200,000 in checking but I can’t. But that’s not because it’s not separated from savings, it’s because it’s not invested and is therefore losing purchasing power every year due to inflation. I understand some retirees pull three years out at a time, in case the market takes a nose-dive, so they can skip a year or two of withdrawals. But that would mean a $66,000/yr spending income (although perhaps the same system could be done with five-year intervals, which makes it a more reasonable $40k but still). Anyway, I think leaving too much money in cash accounts is paranoia in one sense (perhaps worried that the markets are going to fail) but not enough concern in another (both inflation and the difficulty of trying to get that much money replaced if your card gets stolen).

    But as to the point with segregating savings, I don’t see a point to it. I have enough in my credit union savings account to maximize their high-rate interest (only a couple bucks a month at 4% but why not?) and to cover simple emergencies. I have enough in my checking account to get by month-to-month and again, cover simple emergencies. The rest is invested. Keeping multiple checking accounts or savings accounts just complicates the matter. Indeed, if it wasn’t for the interest, I’d just have one bank account — checking. Dividing up what that money is for is the job of the budget, not the job of multiple bank accounts.

    So I’d take the opposite recommendation and *not* separate different savings goals into different bank accounts but *do* use a budget system in which you can determine the purposes of your savings (I recommend YNAB). If you have to move money between bank accounts that’s much harder than just changing a cell in a spreadsheet or budget program (and you’re limited to six “convenient” transactions per month without penalty). So do define roles for your savings but don’t create multiple savings accounts, that just complicates things unnecessarily.

    • Hi Tamara. Thanks for your suggestions!

      I think what you suggest is totally fine, and is in fact how I used to do it myself. The only issue I found was, since a budget is only a month-long document, there was a place to say “Add $50 to travel fund” but no place to say how much I had in total. So I was keeping a different spreadsheet that showed how the money I had in my single account was divided up. With multiple accounts free and easy to create, I could automate all that. But if the spreadsheet feels simpler for your situation, that’s fine!

      Ultimately, no matter how we keep track of it, I think the most important thing is to be mindful about our saving. Which it sounds like you totally are, so keep it up!