Navigating the world of personal finance can be difficult at first, especially because of all the conflicting advice you might stumble across. And one piece of advice that you may hear conflicting information about is how many savings accounts you should have.
On one hand, some will argue that you should keep your finances as simple as possible. Therefore they recommend you not have more than one checking or savings account. While I agree that shouldn’t make personal finance any more complicated than it already is, there are certain cases where you should have more than one checking account, and everyone should have more than one savings account.
3 Savings Accounts to Have
Keeping track of more than one savings account shouldn’t be difficult because a savings account won’t have many transactions running through it each month. After all, the point of a savings account is to hold your money until you need it, not to make daily transactions like a checking account.
Most people can get away with having 3 different types of savings accounts, although some personal finance bloggers recommend more.
Here are the three basic types of savings accounts that you should be putting money into every month:
Emergency Fund Savings
We’ve talked about emergency funds and where to keep them before. The basic idea of an emergency fund is that you continue putting money aside for emergencies until you have at least 3-6 months of living expenses saved up.
The only time you should ever withdraw money from this account is for a true emergency, like a job loss, a natural disaster, or your car breaking down unexpectedly. Things like needing to buy Christmas presents, planned home improvement projects, and a vacation are not things you should be funding with your emergency fund. Likewise, you should not be relying on other types of savings accounts, like your retirement account, to pay for emergencies.
In an account separate from your emergency fund you should have savings for the things I just mentioned. This is where you will save up for large planned purchases. If you are saving up for several goals at once, you might even want to have more than one personal savings account.
Keeping your savings somewhere like CapitalOne360 or SmartyPig will allow you to nickname your savings accounts anything you want like “2016 Vacation” or “New Car.” You can also set savings goals so you can track your progress via a progress bar.
The third type of savings you need to have is retirement savings. It’s important to start saving for retirement as early as possible while time and compound interest are both on your side, but many people aren’t. According to research done by the U.S. Census Bureau, Saperston Companies, and Bankrate, the average savings of a 50-year-old American is only $42,797
Hopefully those people are not planning to rely on Social Security when they retire, because the Social Security system was designed to be supplemental retirement income, not a primary source of income for retirees. This is why Social Security payments are only average around $1,300/month, which is likely less than what most people in careers are used to living on each month.
It may seem like you are saving too much of your monthly income if you are contributing to these three savings sources each month, but the good thing is that you’ll have that money in the future when you really want or need it. This is far better than using it to fuel your impulse purchases today.
Do you save money in each of these three savings accounts every month?