Do you know what one of the most popular questions I get asked is?
How I got to be so sexy How to make the most money off your savings :)
And why not? Who wouldn’t want every last dollar of theirs to be maxed to the gill and flow faster than Scrooge McDuck’s? We should all be able to take a dip in our wealth every now and then!
But here’s the thing – not every dollar of ours is meant to build wealth. Every dollar needs a *purpose*, but that purpose will differ depending on our current goals. Do you think money for bills and money for investments are to be used the same way? Or money for savings vs. money for paying off debt*? Of course not. Different attacks for different scenarios.
The *real* question to ask is:
What’s the mission of this dollar I have?
Is it to grow wealth? Protect my future? Save for that life-sized cut out of Kim Kardashian you’ve been eying? (Only $78 – what a steal!!). In some instances the returns matter greatly (investing) while others it does not (short-term savings, “fun funds” etc).
The point is, not every dollar in your pocket is used the same.
(*Though FYI – paying off debt is one of the BEST returns on your money! Just look at your interest rate and you’ll see why… Scary, but in this particular case kinda awesome! (But not really))
Here’s my general guideline of where I put my money, and why.
Money for paying the bills (this month): Checking account. It’ll be going out as fast as it comes in! Ain’t no one gonna make money off that.
Money for short-term savings (1 month – year): Savings account. While technically *savings,* you and I both know the money will be spent at some point in the near future, so it’s really more like *delayed spending*. But that’s totally fine! That’s the purpose of this particular bundle of bills here. And since we’re only talking about a short amount of time, and usually a small amount of money, the interest rate hardly matters here. What does is that you actually get the funds you need so you can complete the mission! So stop worrying about the best returns!
Money for long-term savings (1-3 years): Higher-yield savings account (or money market, CDs, bonds?). I personally mix all my savings into one main pot just for simplicity reasons (there is merit to separating them all out though!), but this is the point where your returns starts mattering more. Not the *most*, as again – we’re still talking about a relatively short term here – but it’s certainly worth investigating more. Remember that more reward = more risk though, and if this cash needs to be preserved above all else to hit your goals (i.e. earnings is a nice secondary), you’ll want to be careful and err more on the conservative side. Your chance to make a killing is coming up shortly ;)
Emergency Fund (forever :)): Higher-higher-yield savings. This is the part most people will start disagreeing on as it’s usually a bigger pot of change (if you even believe in emergency funds, which I hope you do!) but to me it’s just another area where cash is king and it’s not meant to make me insanely rich. It’s meant to make me richly sane (see what I did there?). And in a perfect world this cash would remain completely intact until the day I die.
Money for investing! (20-30-40 years): Stock market! Now THIS is the point where returns matter greatly! Your #1 goal here is to GROW GROW GROW, which means more risk, more funding, and the key ingredient of them all – more time. You’re not going to be able to retire off cash, so you’ll have to find the best strategy that works with your goals and personality, and then start turning up the heat.
For some this will be real estate, investing in businesses, starting your own business, hoarding gold and silver, collecting art or coins, and my personal favorite – the stock market. Particularly index funds, and particularly Vanguard (and particularly VTSAX. Particularly :)). Now each of these have their own set of pros and cons, so your job is to sort through them all and start dabbling in the ones that make the most sense for you. Maybe your fingers end up in a variety of them, or maybe you concentrate on the one or two that make the biggest difference to you, but whatever the case – you need to start pouring the money in and then leave it alone to get marinating… This will be the difference of you retiring at 60 or you retiring at 160. Or even better, 40 – if you’re ballin’ with the FIRE community.
This is the hardest, but most important, category of them all. And where you should be concentrating your chase of higher returns vs your savings account. (It DOES get easier as you start figuring things out :) Once you’ve got your strategy(s) picked, it’s all about just directing the money where it needs to go and moving on with your life! Time does everything from there!)
Money for wealth protection (until you die): Insurance. This falls into the “bills” section really, and is a part of the checking account system, however, I separate it out just to show that these dollars have their own distinct purpose too. And while it does mean money going out the window every month, it’s main job is to PROTECT you and your family in the event of anything nasty happening – like a car crash, house fire, your unfortunate demise!, and on and on and on… This is where other more complicated products come in too, such as estate planning or trusts or other insurance/investment type concoctions. No one enjoys funneling their money here, but at least it means you’re still alive!
Money to be blown! (Any day!): Savings. If there’s one area that gets overlooked the most, it’s your “fun money.” Or what I like to call “blow money.” Out of alllllllll the areas of finance, this is the one place you’re allowed to get crazy and do as you please! No questions asked (so long as you don’t tell anyone ;)). The amount here will differ for people ($50? $500? $2,000?), but the purpose of this money is clear: to have fun and release stress. You can’t go full throttle 24/7 if you don’t want to burn out. You need a release valve, and this fund here helps you do exactly that.
So… is it good to find the best ways to grow your money and ultimately your wealth? Indeed. But do you need to do it with every last dollar you bring in? No. At least I don’t think so.
Any time you catch yourself trying to max out every other dollar, remind yourself of what the true *mission* is for this money, and then allocate them respectfully. You always want more money in the *investing* stage than all others if you can, but we’re all in different places so just do your best and get that structure down pact as you go. The empire will grow from there!
And while you wait for your dollars to percolate? Work on making more of it!!
Now who wants to loan me that $78?
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I’m not saying my first purchase after I got my first ever paycheck was a full size cut out of The Rock, but I’m also not going to deny that.
As far as E-Funds/Long Term Savings, 10 year treasuries or TIPS might be a good choice, but they aren’t zero risk. I keep mine in a high yield savings account and just note that I have to add to it each year to keep up with inflation.
Haha….
Did you know your Rock is now the highest paid actor in the world???
http://www.forbes.com/sites/natalierobehmed/2016/08/25/the-worlds-highest-paid-actors-2016-the-rock-leads-with-knockout-64-5-million-year/#54c148a645da
Talk about a smack down!
Can you smell what the Rock is cooking?
Yea, big fat checks dipped in managed accounts and wise counsel.
Nice breakdown! Personally I’ve never had a long term savings (1-3). I suppose anything that comes up to buy in this timeframe will just be part of my normal budget process and paid with earned income.
Also I recently detailed why I don’t maintain much of an emergency fund and what my backup alternatives are.
So I basically just roll these two categories into my investment accounts for retirement. Just my personal strategy and it works for me.
That’s what you gotta do, man – stick to what makes the most sense for you. And it won’t suck getting a better return for your $$ either :)
Loved the Duck Tales references – http://www.bandofsavers.com/2016/08/10-things-duck-tales-taught-me-about.html?m=1
Our break down is as follows: We have our checking for current expenses and our first defense against emergencies – kept at around $1,000 – $2,000 dollars and earning 0% interest.
Saving accounts to serve as our short term emergency funds or for expenses that we are budgeting for – usually around $4,000 earning a few cents a month.
High yield saving account for an emergency fund incase it hit the fan – currently at $9,200.
Extreme emergence fund to get us by incase everything goes wrong. This is all invested 100% in the stock market with the hope that it isn’t needed. Intended to build as much wealth as possible.
HSA funds are 100% in stock with the hope that I won’t have to use them for a long long time.
401(k) retirement funds are 100% in stock since I wont touch them for another 40 years.
Current breakdowns are always found here: http://www.bandofsavers.com/p/net-worth.html
I love the idea of HSAs so much but still haven’t brought myself to do it…. I would if it was only my wife and I, but the kid stuff makes me so nervous…
I did just find out that the gov’t offers some sort of flex spending for federal employees for daycare though – so we just started pouring that in since most of my wife’s check goes right to daycare anyways! But now it’s pre-tax money – woo!
What makes you nervous about HSAs in regard to having kids?
That it’ll end up costing a lot more taking them in all the time when they get sick/hurt :( High deductibles freak me out…
This is a good perspective. Some money should be optimized, and some doesn’t need to be.
I spent some time early on trying to find the best possible savings account for my money. Eventually I did the math and realized that all of this time and effort was going to make me an extra $100 per year or so. Sometimes there are much better uses of your time than trying to max out every dollar.
Haha, yup… and you KNOW you end up spending way more time than you think just setting up the new accounts, automatic deposits/payments, xfering the $$ over, etc etc. Then only to do it again months later when you find another place offering .01% more ;)
I listened to the MONEY show podcast episode you and Paula did on Betterment, Wealthfront, Robo-advisors. I moved my Roth IRA from Fidelity to Wealthfront and really happy with it so far.
I wish there was more discussion on money market funds, CD’s, and stuff for growing savings. Right now much of the conversation seems to be either to put in high-yield savings account (Ally, Barclays) or to stick it in index funds.
Yeah, probably because CDs and money markets are just so boring haha… and most people like reading about the extremes :) I also don’t personally dabble in those anymore so it rarely shows up here just ‘cuz I only write about stuff I’m actively involved in. Congrats on the Roth move though!
I’m sure an unfortunate amount of those cut outs have been sold.
We use an online bank for our emergency fund, run the rest out of our checking account – don’t really keep a long term savings account for anything right now
Nice breakdown! I pretty much follow the same steps but completely skipped the fun money!! I realized recently that I need to loosen the purse strings to allow for some fun stuff more frequently. I think when you first dive into the FIRE world you get caught up in optimizing each buck that you forget to spend a few on yourself. Time will take care of compounding the rest. Thanks for the reminder!!
Yup! You need a little taste of freedom, I say, to get you through to FIRE in the end ;)
Neil and I were just talking about the purpose of money last night, and we absolutely agree with your take on it. Sometimes we feel frustrated that we can’t invest more, but there are boring things like new tires to pay for. Allocating based on real life expectations helps alleviate that feeling of guilt that can come with spending.
I struggle with this so much. I wrote a post on it a while back because savings (only to spend in 1-5 years) doesn’t really feel like saving to me. But that’s just silly. If I’m using money to get another Master’s degrees, that will turn into an increase in income for me. Still, I struggle so much with parting with that money despite the fact it’s labeled short-term savings on my spreadsheet. Also, my students would argue that cut-out is a steal. They are convinced that she’ll be the first lady in 2020. Thankfully, they still won’t be able to vote in that election ;)
Hahahhahahhahaa…….
OMG that was good… Had to keep my coffee in my mouth real hard on that one!
Kids – hah.
I like how you’ve split all the money into different areas and they definitely all have different uses for different times (even if the dollar is all worth the same).
We do the same kind of thing for our money, we definitely know what we want! Now just to earn more money to do it all..
Tristan
So important to remember that not every dollar is for investing. Food and fun are needed in your balanced life.
My house in college had a cut-out of Viggo Mortenson in Lord of the Rings that was scary as hell and would sometimes be waiting for you as you exited the shower. Definitely more terrifying than when they put Lara Croft out for you.
ACK!!! I’d scream like a little girl if I opened up the curtain to see that! Haha…
Ok, I both love and hate that you had Viggo shower-stalker.
When I was a high school kids we had a George W Bush life size cut out (don’t ask) that I used to hide on the outside of the house looking in. Scared the crap out of my mom and brother countless times with that thing.
Haha…. Because it was a person, or because it was George Bush? :)
The answer to that question is Yes
This is a great breakdown, J. I’m more Scrooge McDuck than I’d like to be really. As such, I do try to maximize every cent. For example, all bills are paid on a CC, which gets me 1.5% cash back, which is more than my bank pays out.
I’m also a huge proponent of the blow fund and am glad to see you recommending it as well. I put way more in there than anyone in the FIRE community would recommend, but you know what they say: all work and no play makes Jack a dull boy!
I don’t have categorized savings (as far as short and long term), it’s all just in one pot and I try not to touch it any more than I have to. We also have investment accounts and the HSA savings.
I really need to give myself a blow fund. I’m am such a cheapskate, and I always have that uneasy feeling when I buy something for myself “just because”. That said, I will never pass up a good life experience! Hello vacation.
I honestly tend to just stockpile whatever I can into investments. I’ve never really used a savings account since I’ve been on my own and I don’t keep more than a few months worth in the checking account. It’s never made sense to me why I’d want to keep a lot of funds in low yield accounts, But I’ve had a pretty stable job and have been able to cash flow any unexpected appliance replacements or auto repairs or whatever. I just invested way less those months.
I def need to boost that cash cushion when I temporarily turn the main income stream off to go exploring though. :) I also think the idea of giving yourself permission to blow a certain amount is appealing, but I think I’ll always feel guilty about blowing money over the status quo when so many of my peers are saddled with debt and couldn’t blow it even if they wanted to.
Oooooh “exploring” huh? What do you have up your sleeves over there??
Well…since you asked.
I’m going to go on a road trip and live in AirBNB’s for….however long it takes? I have 30 states that I haven’t been to yet and I have 30,000 miles and a year left on my auto warranty. It all just sort of worked out that way.
I feel like my dividends (as well as my savings) will go a lot further basically anywhere that isn’t called California, (or DC or NYC).
There’ some very cheap Real Estate in a lot of these places that I will be exploring. Who cares if the jobs might pay a bit less when you can buy a small house for cash or rent at a drastically lower cost?
What could possibly go wrong, right? ;-)
It will be a great adventure…or misadventure, and I will be blogging all about it I’ll let you know when the blog starts to get interesting, right now it’s basically just “practice”. :)
AHHH!!!! SO COOOL!!!!!
Pack me in your suitcase please!!
Every dollar does count.
Having multiple account to separate the different areas you want that money to be used for is critical. For me I have these.
-A checking for receiving moneys
-A Savings for short term spending
-A High interest savings for money parked until I decide what stocks to buy
-A Canadian Investment account for Canadian stocks
-A Us investment account for Us stocks
-A Safety deposit box for the zombie attack for silver and cash (not much)
Haha…. I have a home safe for just that reason too ;) Or you know, I have to flee the country real quick.
I don’t have an emergency fund. Rather, I leave enough room in my margin broker account that I can withdraw funds if something were to come up.
This way, I still have emergency liquidity without having capital sitting around without generating a return.
Creative!
Hey My Brother,
Please excuse this lengthy message. It is more for me to get my thoughts straight on this subject, but I would LOVE your feedback as to how I am doing here.
This is a great article in that there are lots of people who say ‘give every dollar a job’ but precious few that start to actually discuss what kinds of jobs to give those dollarinees.
I wonder how you would help somebody who is just getting started in consciously managing their money with giving every dollar a job. Here is how I would do it…please give some feedback:
1. Before you do anything, create a spending journal to build awareness of your present moment habits and decisions and to make immediate changes where you know you need to make them.
2. After about 3 to 4 weeks of spending journal, put expenses in categories. YNAB offers some good basic categories, you offer more nuance here in this article.
3. Determine some short term goals and long term goals. That is where an article like this one would be most useful, I think as it shows some possible goals.
4. Create a budget/plan that includes you goal funding strategy and expenses that you tracked and wish to continue.
This would include: a) target expenses for all the categories discovered with the spending journal b) create a funding schedule for each goal (how much can you allocate per period of time?) c) where to place the money for each goal (again, this article provides some excellent clues) d) what system to keep track of it all (spreadsheet, YNAB, etc.?) e) put a date each month on the calendar to review your targets and the reality of your accounts. Personally, I do this weekly, but monthly is a minimum.
I like it! You know why? Because you put PLANNING and FIGURING OUT YOUR “WHY” up front – before even taking any action. Which is the opposite of what many people end up doing and then wonder what went wrong.
The first thing I ever did when I wanted to improve my situation was to do just that – track where all my money was and then figure out what goals I wanted to shoot for. Then I started budgeting and then putting the plan in place as far as accounts and what money gets sent where, etc.
So I think that’s a fine list you have there, sir – and love that you have dates scheduled in for regular check-ups too :)
A purpose indeed and a dollar in need. So having all different buckets is the way to go with savings. As long as the buckets don’t leak you are golden.
This is a good way to look at money. I have most of these allocations myself as well. Though, I “blow” too much money on takeout food – I’m working on it.
Side Hustle Proposal: cutouts of J.Money for PF bloggers! You’d make that $78 so fast ;D
I like to make my dollars all do more than one job so I hate it when I have to spend it on money protection (life insurance) or shelter (mortgage) in a way that doesn’t give me cash back. Stop thwarting me, people!
HAH! Maybe bought out by my mom :)
Two great statements:
1. “*delayed spending*” as opposed to “savings”. Love it. Much more accurate.
2. “The empire will grow from there!” Yes Vader. Yes it will. May the finances be with you.
Focusing on returns is a bit like the dog who gets distracted in the movie “Up!”. Squirrel! Saving a greater percentage makes a HUGE difference in overall success long term. A high return on peanuts is still peanuts and will be for a long time. Better to stoke the FIRE with more moolah early on than fuss too much about a greater return. Put your $$$ in an index fund and focus on adding to it by saving as much as makes sense for your situation (Caveat: as long as you’ve paid off your high interest debt that is…, just as you said early on in the above).
We really enjoyed this article! It is true that every dollar you save is for a different purpose whether it is to spend the next day or save for 60 years in the future!
Enjoyed the article and the tidbit about The Rock’s earning power : ) I love me some short term savings (we have a travel fund we contribute to every month) and fun money budgets. Thanks for sharing!
Yeah, I’m one of the people who has a savings account for so much. In the end, I usually end up using cash that’s just sitting around to pay off the mortgage faster when I get sick of seeing it sitting around without a purpose…
Good problems to have :)
I love the “money to be blown” account idea. It’s so easy to stay laser-focused on 10-20 years down the road. As Ferris Beuller said, “Life moves pretty fast. If you don’t stop and look around every once-in-a-while, you could miss it.”
Thanks for the reminder!
Man that was such a good movie…
Hot damn that Kim K photo really got me. Can’t believe she makes like $20 million a year. If only personal finance blogging was as popular as porn
It’s nice that you know where your money goes and it has purposes for each category. Nice one J Money.
Alright, now we need the follow-up article on your other popular question… “How I got to be so sexy.” :)
It’s all in the budgeting ;)
Another great one by J$….it took me a while to start thinking like this but now every paycheck or extra $ that comes I know which account it’s going into and what it’s purpose is. I’ve been 70/30 on the stocks/bonds in my 401K but after playing golf w/a financial advisor I’ve recently switched to 100% stock.
My argument: What about another crash? Don’t you want some bonds? Isn’t the market to high to only buy stocks right now, it’d be expensive.
CFP Advisor: Stocks were the highest ever in the 60’s, 70’s, 80’s, 90’s etc…they always feel high but if this is your 401K money you should plan to never touch it till 65. So invest 100% in stocks (low cost index) and can tame it down as you get closer to retirement. But 30 years out you need to be 100% equities…
Yep I’d pretty much agree (though not sure about being *all* out of equities in 30 years, but def. tapered down more). The nice thing about crashes at a young age is that you can just scoop up so much more of it all! And since you’re not tapping it for decades it’s not like you really “lost” anything anyways on the money you do currently have invested. Still, I know people get nervous and not everyone is comfortable going “all in” like that so no shame in adding in more conservative funds to help balance it out.
That’s a great point “not every dollar is meant to build wealth.” I allocate my dollars to where I think it gives me the most opportunity, whether it’s on leisure, necessary expenses, or anything else. I sure have a lot of money tied up in the stock market too though :)
I’m sure you could find discount stores that let you buy a life size Kardashian for less than $78 :p
Well now you know what to get me for Xmas :)
(Some of your stocks!)
For me, it’s frustrating how low the returns are in all the relatively risk free savings instruments. I don’t really find it worth my effort to open a new “high yield” account at a new bank if it’s going to return 1%, so most of my short to long term savings has just been sitting in my checking account.
I would like a safe investment with a decent return where I can park some money until the market comes down a bit. Is that too much to ask?
Haha… you’ll get it at some point, but along with it will come some even higher credit rates :) Hopefully by then none of us will have any debt needs anymore!
Great breakdown! We usually tell our Financial Gym clients to keep a minimum of 6 months worth of their fixed expenses in their emergency fund. It’s important to review your expenses and adjust your savings numbers on a regular basis so you can live comfortably for a few months should anything happen.
I love this! Taking a long-term approach to money has also helped me completely cut out impulse purchases. If you train your mind to think of money as an improvement or investment tool, it makes you think twice about those cardboard cutouts of Kim Kardashian. ;)
I’m still working on putting my money towards index funds, like Vanguard. Right now we’re still working on getting out of debt, which will yield a higher return than investing, but soon we’ll need to consider our options to let our money grow passively.
Can never go wrong paying off debt!
Get that *ish taken care of, and then pour it all into investments! :)