One of the worst tragedies I come across often in my practice, is a good saver who has $50,000 or even $100,000 sitting in a savings account earning them only 0.01% interest! Oh, the horror! The fact is, they just don’t understand the types of savings accounts you need to make their money work for them.
When I see this situation, it is time to explain the various types of accounts you have and show the account holder how to maximize the money they have saved and make it start to truly grow for them.
Don’t get me wrong, if you have it there for a reason such as you are making a large purchase soon and it is waiting on the right timing. Or you just got it and are allowing yourself some decision time before you move it into the right accounts, then you are on the right track.
For those of you that have large amounts of money in a low-yield savings account, let’s talk about the 4 types of accounts you need and start moving your hard-earned money to places it can work for you.
1 Emergency Savings Account
Everyone needs an emergency fund because life is full of surprises and many of them come with a price tag.
The sad fact is according to the Report on the Economic Well-Being of U.S. Households in 2020, 35% of the Americans surveyed do not even have enough cash to cover a $2000 emergency. Most also said that this type of emergency would put them into debt.
How much should you have in your emergency fund?
One financial guru says to always have at least $1000. That would cover many emergencies, but the fact is that you need to go one step further than a flat amount to know what should be in your emergency fund.
Your minimum in your emergency fund (or your first goal for your fund) needs to be at least the amount that would cover your deductible in the case of a problem with your car or home. $1000 may be enough, but check to be sure yours isn’t higher.
Then you can save more till you have the standard you hear about, 3 to 6 months of your living expenses in case of illness or job loss.
2 Reserve Savings Account
A reserve saving is one you may never have heard about.
This account is where you save for the expenses that you expect to have each year, but don’t happen every month. This money should be separate, whether in a separate account or just tracked separately.
The easiest way to plan for your reserve expenses is to prepare them as part of your annual financial planning.
Use a piece of paper and draw out 12 boxes or sections, one for each month of the year.
Layout the expenses you know you will have. Things like birthdays, anniversaries, Christmas, summer vacations and if you need something like tires this year, add that too. Don’t forget things like quarterly expenses like HOA or annual costs like memberships and
List how much you expect to spend with each event. Add up all your amounts, divide it by 12, then that amount is what you should be deposited into your reserve account each month.
Remember, you should not be spending your emergency money on things you expect to pay for. It should be set aside until an emergency (something you don’t expect) happens and costs you money.
Every expense you expect should be part of your general spending plan or budget, even when it happens occasionally.
Some people call these sinking funds. I just like to be more simple about it and
3 Goal-getter Savings Account(s)
Your goal-getter account is where you save for goals you have set. First, you need to set your financial goals.
For example, when you are saving for a big vacation, you save for it in a goal-getter account. Anything you are intentionally saving for is your goal for savings.
Where you put it is another discussion entirely.
You may have several accounts for your goals, put the money where you will make the most interest. You can decide this based on how long you will be saving for that goal.
Short-term goals can be saved in a High Yield Savings Account or if the market allows sufficient interest, in a CD or Money Market Account.
Goals that will occur in 5 years until the saver turns age 59 ½ can be saved in an investment brokerage account.
4 Retirement or IRA Savings Account
The final savings you need, if you are not in full retirement, is an Investment Retirement Account (IRA).
This is the place where our dollars can work the hardest for us and gain the most growth. They get to do double duty.
First, they have the magic of time which compounds the interest in ways we don’t see any of our shorter-term savings and investments.
Second, they have the gift of tax breaks. Always save something in an IRA, even if it is a small amount. If you can, save up to the maximums which change over time.
If you have an employer that matches funds you put in, that can add additional dollars that you don’t even have to save. Try to get the matches offered to you and then beyond that add what you can up to the maximums.
You can both fill the maximums for your 401K (or another employer-sponsored account) and your IRA at an outside institution.
Why is it important to diversify your savings?
Diversifying helps you plan for various goals as well as maximize your interest earned on every dollar you are saving.
If you want more help with planning goals and gaining the most interest you can on your money, schedule a coaching appointment for a savings strategy session today.