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When it comes to finances, it’s important to be organized. Organization keeps you on track with your goals, makes it easier to budget, and helps you stay sane during tax time.
One part of your finances that can messy, if not organized properly, is your savings. With so many different things to set money aside for, it’s best to split it up. My favorite approach is having multiple accounts for various purposes. Here are four types of savings accounts that I think everyone should have:
An emergency savings account, or “emergency fund”, is the most important savings account you should have. It’s meant to bail you out of tight situations, in which you would’ve otherwise needed to go into debt.
There are countless circumstances where emergency savings come in handy. Here are a few examples:
- Job loss
- Home repairs
- Car repairs
- Natural disaster
- Death in the family
- Large medical bill
It’s recommended that you have three to six months of expenses in your emergency savings account. If you live in a dual-income household and have no dependents, you won’t need as big of an emergency fund as someone who lives in a one-income household and has dependents.
The best place to keep your emergency savings is in a high-yield savings account. This is liquid enough for easy access and still earns you a little bit of interest while you’re not using it. There are quite a few online banks that offer high-yield savings accounts, including Synchrony Bank, GS Bank, Ally Bank, and Capital One 360. As of November 2016, their rates ranged from 1.05% down to 0.75%.
Once you’ve saved enough in your emergency savings account, it’s time to establish your short-term and long-term savings goals. Short-term savings goals are meant for things you plan to purchase/spend money on within the next five years. For some, that might be a vacation, a wedding, a car, a house, a new TV, or new furniture.
Money for short-term goals shouldn’t be invested in the stock market. It’s too volatile for a period of savings under five years. Instead, consider saving your money in a high-yield savings account, a certificate of deposit (CD), or money market account. All three of these options offer you a small return on your money but the security that your money will not lose value in such a short amount of time.
One note about CDs: your money is tied up in the account for a period of time, and usually can’t be touched without incurring a penalty fee. (Ally Bank offers a No Penalty CD option, but it includes a lower interest rate.) Only choose a CD if you’re sure you won’t need to dip into the money for anything during the length of time you have your money in the account.
You can save for short-term goals and long-term goals at the same time. Two examples of typical long-term goals are college and retirement. Saving for long-term goals usually involves investing your money in the stock market, since you have more time to ride out the volatility.
Saving for a child’s college education can be done in many forms. One way is through a 529 plan. A 529 is a tax-advantaged savings plan, which is meant to encourage parents (or grandparents, extended family, etc) to save for their children’s future college costs. Returns on money in 529 plans are not subject to federal tax, as long as you use the money for college expenses. All states offer 529 plans, and you aren’t restricted to enrolling in the one that’s offered by your state.
Another way to save for a child’s college education is through a regular investment account. This may be a good idea if you’re not sure your child plans to go to college. You can simply invest money in an index fund with any brokerage.
Learn More: 7 Clever Ways to Pay For Your Kid’s College
Saving for retirement can be done in many forms as well. One of the easiest ways is to put money in an employer-sponsored retirement account. This will either be a 401(k) or 403(b) plan. Money is contributed to these plans pre-tax, which lowers your taxable income.
Another way to save for retirement is through an individual retirement account, whether that be a traditional IRA or a Roth IRA. These are good options if your employer doesn’t offer a retirement plan and you want to save on your own.
One Perspective: Save for Retirement Before You Save for College
The last type of savings account everyone should have is a health savings account. This doesn’t necessarily have to be an HSA, which you’re eligible for when you have a high-deductible health insurance plan. It can also be an FSA (Flexible Spending Account), which you typically get when you have a regular health insurance plan.
It’s important to have some type of health savings account because medical expenses are virtually unavoidable. Between co-pays and deductibles, medical bills can easily add up and cost you a lot. Having a dedicated account for medical expenses will be useful in helping you stay on budget and not dip into your emergency savings.
Learn More About Using an HSA to Save For Retirement
There’s no magic number as to the amount of money you should save each year for medical expenses. That will depend on how healthy you are, any medical conditions you have, and how much protection you feel comfortable having.
We all have different goals in life, some short-term and some long-term. It’s important to have savings accounts that match those goals. In addition, having an emergency savings account is crucial to making sure you stay on track with those goals and making sure that an unexpected expenses doesn’t impede your progress.
A health savings account may not be something we all think about, but it’s important to have one. If you use an HSA or FSA, those accounts come with tax benefits. If you don’t have access to either of those accounts, it’s still important to save for medical expenses, even if it’s just in a regular savings account.
No matter where you choose to tuck your money away or what you allocate it for, one important point remains across the board: save as much as you possibly can. It’s better to have it waiting there when, and if, you need it than to rack up debt for extra expenses.