On the quest for financial independence, a person will find no shortage of tips and tricks to designed to help get them to the fiscal Promised Land. Some of them are good, while others appear to be gimmicky. In personal finance, one of the most important skills someone must learn in order to master their money is saving. Whether it is for something long-term like retirement or short-term such as a ski vacation to Utah, the ability to set money aside on a consistent basis is paramount in order to be financially successful.
There are different methods people have used over the years to save money for long-term expenses and goals. Some keep track on a spreadsheet or piece of paper so they know how much of their savings is set aside for each goal. Some take the money out in cash and place it in different envelopes or containers while burying it under their mattress. Another successful way is to designate specific savings accounts for each goal and consistently transfer money into them. The focus of this article will be on the last one.
When using targeted savings accounts, an individual will open multiple accounts and designate each one for a specific goal. One might be for Christmas, another or an annual insurance payment, while another may be for an eventual down payment on a home. There is really no limit to the type of goal, as long as it will require consistent savings.
Where can you have multiple savings accounts?
Most banks will allow you to have as many accounts as you want, but with the recent changes to the system it can be difficult to jump through all the hoops in order to avoid paying any fees. One of the best locations for these types of longer-term savings goals is an online bank such as ING Direct or Ally. They allow you to open up new accounts on the fly and can transfer money directly from your main checking account from almost any bank.
A big advantage of keeping the accounts in a separate bank from your daily checking account is that the money takes a few days to transfer. This may seem like a downfall but what it does is prevents you from making impulse buys with your hard-earned savings. Money designated for goals should not be touched unless there is an emergency or a change of plans. The sale going on at the mall typically does not count (unless that was one of your savings goals).
Calculating the amount needed
Once the accounts have been established, it is important to determine how much should be deposited on a regular basis to achieve your goal. A simple example would be a Christmas budget. If you establish the account at the beginning of March and want to have $500 in it by December, you divide $500 by 10 months. By depositing $50 a month into the Christmas budget, you will not have to partake in the holiday credit card shuffle at the end of the year.
Automation is key
As with retirement savings, automating the process is the only way to successfully get there for most people. Something will always come up that seems like an emergency and force you to delay your payments until another month. By automating the transfers you are helping to pay yourself first and avoid moving money around when things feel a little tight. Almost every bank will allow for reoccurring transfers on a weekly, biweekly, monthly, or even quarterly basis. Taking advantage of this feature is almost as important as opening the accounts themselves.