[Please welcome my friend, Chenell, today from Bright Cents. While I typically like keeping my accounts super simplified and streamlined, I gotta admit it’s not the best for goal setting and motivation. I learned this fast when we opened up a new account for our Challenge Everything money and it’s been a total game changer. Take it away, Chenell!]
When we talk about savings accounts, we generally think higher interest rates are good, emergency funds are great, and you only need one of these accounts and you’re done.
This isn’t exactly true. I used to be the same way though – I had one checking account, one savings account, and thought that’s all you ever needed. Well, I recently stumbled upon a method to savings that I find absolutely awesome and wanted to share it.
If you only have one or two accounts, think about how many different goals or upcoming bills you are currently saving for. My guess is you have more than one or two. Are you saving for an upcoming vacation, a yearly car insurance bill, money for a car you might need in the near future, an emergency fund, etc.?
Right now, I have 8 different savings accounts. Why on earth would someone need so many different accounts just for saving money and complicating their life even more?
Having one large sum of money set up to save for multiple goals leaves too much room for question marks. Based on personal experience, it also slows your saving tremendously, which then makes accomplishing your goals take even longer.
Here are six reasons why having one savings account = BAD.
1. You will forget how much you had saved for each goal
Let’s say you decided to set up a Roth IRA account. Most Roth IRA’s require a minimum $3,000 investment just to open an account, so you start working on saving enough to open one up.
You just received a gift of $200 from a family member for the holidays, so you put it into your savings account with the idea that you’re saving for your Roth IRA. Then July rolls around and your insurance company sends you a bill. Without doing it on purpose, you might end up spending that $200 you had set aside on that bill. Congrats! You’ve just pushed your goals back another few months.
2. You’ll forget what you were even saving for
As a human, it’s quite difficult to remember every single thing we’d like to. “When did I pay that bill last? When is the mortgage bill due? What the heck was I saving this for??” We are pretty terrible at the whole memorization thing.
Having nothing to remind you of what you’re saving towards leaves a much greater chance that you will forget at least one of those things.
3. You think you’re saving more than you really are
Let’s say you are putting $250 each month into your savings account. That sounds great, right? But, when you’re saving money towards 5 different things, you’re only truly saving $50 towards each goal. If one of your goals really was to save $3,000 to open that Roth IRA, you wouldn’t have that goal completed until 60 paychecks had passed, or almost 2 1/2 years. Saving $20,000 for a down payment on a house? You wouldn’t be moving into that house for over 15 years.
When you break down your goals into separate accounts, it’s much easier to see your progress and how far along you really are.
TIP: A lot of your goals have set deadlines, like the date a bill is due, or a specific time frame something needs to be completed by. In addition, many banks allow you to add nicknames for your savings accounts, and these nicknames can usually be pretty lengthy. Do you see where I’m going with this? Why not include the due date for that goal/bill part of the nickname of each savings account?
Here is an example of one of my savings account nicknames:
It includes the name of the bill, the amount needed and the date it’s due. This makes it very hard to forget what you set out to do. (EDITOR’S NOTE: Remember our post on financial triggers? :))
If you have the space, go ahead and add the amount you should be saving each month towards this goal, and you’ve just set yourself up very nicely towards reaching it.
4. While the large sum may be a lot of money, you might think you have extra money to spend
Having one large pile of cash can also give you a false sense of reality. Let’s say you have $15,000 in your account and are feeling pretty good about your savings so far. Your good friend mentions the idea of this once in a lifetime trip they are going on and want you to come. “It’s only $5,000! I have $15,000 saved, I can totally go!”
If you had an “in your face” reminder of what you were dealing with, you would have realized that you needed to have $35,000 saved by July, and can’t really afford the trip.
5. You don’t really know how close, or far, you are from achieving a goal
The total amount needed to reach your goals might be something like $50,000. Yet when you have them all in one account, you don’t really know how far you are from achieving each goal. If you’ve never kept track of your savings before, (clearly, this doesn’t apply to the Budgets Are Sexy crew) you could look at your $5,000 total savings account and think, “wow! I’m doing really well” – when in reality, you’re only 10% of the way towards reaching your goals.
You could end up getting comfortable with the amount of money you’re saving. Once that happens, it’s going to be much harder to increase your savings when you feel you are already doing well.
TIP: Are you a Mint user? You know that section called “Goals” where you can set a goal and see how close/far you are from reaching that goal? I always had these budgets set up but they were linked to accounts that had more than one hypothetical goal attached.
Having these separate accounts makes it SUPER easy to utilize this feature to it’s full potential. Since you now have an account set up for each goal, you can link that account with the goal and accurately track how much longer it is until you reach that goal. AWESOME.
6. You won’t put yourself in a last minute crunch
Ever forget about a sizable expense until the bill came, and then made yourself crazy trying to figure out how in the world you were going to come up with the money? With this system you won’t have to worry because you already know that you had planned for that expense. It saves yourself the headache and from maxing out your credit card in one shot.
But am I allowed to do this?
Many banks allow you to have multiple savings accounts without any additional charges. Double-check that your bank functions the same way. Some banks do have minimum deposits, which is a crappy practice but it happens, so CYA and give them a call.
[EDITOR’S NOTE: I asked Chenell who she uses for her savings, and she said Ally Bank – “because of the almost 1% interest rate haha!” ;) I know other banks are catching on to this multiple-savings strategy too, something ING Direct (now Capital One 360) rocked back in the day. I have both my savings accounts at USAA and I’m sure I could open up more too if/when needed.]
What if my goals change?
The nicknames on your account can be altered at any time, so if your goals change you can just log in and have everything updated in no time.
I found that having one big pot of money is just way too confusing. Having multiple savings accounts has saved me time, hassle, and kept me from many of those hectic situations.
Anyone else successfully saving with multiple accounts?
PS: Here are 3 more tips to Chenell’s saving strategy if you wanna learn more!
Chenell runs Bright Cents, a personal finance blog that focuses on helping people get rid of their debt, especially student loans. You can find her on Twitter, Facebook or via email at Chenell at BrightCents.com.
[Photo by james vela]