If you have multiple savings goals, keeping all of your savings in one account can make things complicated. That’s why there are different types of savings accounts to help you better organize and focus on your savings goals.
By having a savings account specifically for a single goal — a vacation, down payment, or emergency fund — you can keep better track on your progress. You’ll also avoid accidentally using funds earmarked for one goal on another one.
5 types of savings accounts you should keep separate
1. Emergency fund
Your emergency fund is money you set aside for the unexpected. It can especially come in handy if you become temporarily disabled or lose your job.
It’s recommended that you have at least three to six months’ worth of expenses in an emergency fund. While that may be a daunting target, try and start your emergency fund with whatever money you can.
Keeping the money in a separate savings account is also beneficial because it’s easier to leave alone. Mixing your emergency fund savings with your other savings may make it harder to view them as emergency-only funds.
2. Holiday spending
It’s not uncommon to ring in the new year with new debt. In fact, credit counseling agencies see a 25 percent increase in people seeking financial help in the first two months of the year. Most of that influx comes as a result of holiday spending.
To avoid going into debt during the holiday season, open a holiday savings account. Put cash into the account each month leading up to the end of the year to avoid becoming dependent on credit cards.
You can also use the account to set a budget for yourself. For example, if you want to spend $600 on the holidays, set a goal to put $50 per month into your holiday savings account. Hold yourself to that budget.
3. Vacation fund
While you may need a vacation now and again, going into debt for a trip with the family isn’t worth it. That’s why eight in 10 Americans paid for at least part of their summer vacations last year using savings.
If you already know where your next trip will be, price it out as far in advance as you can. Then you can begin actively saving toward it. The more you have saved up when it’s time for your trip, the more you’ll relax and enjoy your vacation.
4. Medical expenses
It’s tough to predict when you may incur some significant medical expenses.
If you have a high-deductible health insurance plan, you may be able to set up a health savings account with your bank. A health savings account is a tax-advantaged account created specifically for medical expenses.
What’s more, your contributions are tax-deductible. However, you must use the funds for medical expenses only. Otherwise, you may be hit with a 20 percent penalty on the amount you withdraw.
5. Slush fund
You may have already incorporated some fun money into your budget. However, there might be some things that are out of reach of your standard monthly allowance.
Having a slush fund allows you to save up for the things on your wishlist. Some people may choose to fund this savings account with spare change they get from the cashier at the grocery store. Others may want to save a specific amount in the fund each month.
Whatever savings method you decide on, make sure you are consistent about using it.
Banks that allow multiple savings accounts
Having different types of savings accounts sounds intimidating if your bank doesn’t allow for more than one savings account.
With each bank, you can have several savings accounts with no fees or minimum balances. Capital One 360 allows up to 25 accounts, and Ally Bank has no limit.
Each bank allows you to transfer money to and from another financial institution, so you don’t have to give up your current bank setup.
What’s more, you’ll earn the following interest on each account you have with the banks:
- Capital One 360: 0.75% APY
- Ally Bank: 1.00% APY
Now that you have an idea of what kind of types of savings accounts you should have, write down your savings goals. Then determine which ones should have a dedicated savings account.
If your current bank doesn’t offer multiple savings accounts, consider applying for an account with Capital One 360, Ally Bank, or other financial institution.
Once you have your savings accounts ready to go, set up an automatic withdrawal from your checking account into each every month. This process of turning savings into a monthly bill can make it more easy to reach your goals.
Over time, as your income and goals change, you’ll develop an organized process for maintaining different types of savings accounts. And the best part is you can change how you manage each one as your savings goals change, all the while keeping you on track.
Wondering how much of your income you should save each month? Find out how you can audit your savings habits.
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