For Better Savings: Use Sub Accounts to Differentiate Your Goals

Scattered MoneyOne of the mistakes that we often make when saving is putting everything into one account. It’s fun to watch your account grow, but at the same time, if you have different goals for the money, having everything in one account can be problematic, since you aren’t able to identify which money is earmarked for a specific goal.

Break Out Your Objectives

Chances are that you are saving for different purposes. You might be saving up for a vacation, while at the same time building up your emergency fund and creating a fund for car maintenance and repairs.

Take a look at your financial goals, and create sub accounts that allow you to focus on these different objectives. If you want to have $2,000 in your car maintenance fun, set up a sub account that allows you to save for that specific goal. The same applies to a vacation, home down payment, or anything else. Choose between three and five goals (don’t get too carried away, or you will have more sub accounts than you can effectively manage) and set up accounts for these.

Think about your top savings goals, and how you can reach them. Make sure you earmark your money for the most important items on your list so that you don’t get off track. Breaking out your objectives this way can be helpful because you don’t end up mixing up your money and your goals. If everything goes into one big account, it’s easy to think that you are saving up for your vacation and car repairs. However, if you need to make repairs on your car, and you deplete your account, you might suddenly see that you don’t have what you need for your vacation.

Breaking it down forces you to visualize your major savings goals separately, so that you can take the appropriate steps to meet them. You can decide what is more important. So, if you have $500 to put into savings this month, and you are really focusing on getting ready for baby, you might put $350 toward your baby fund and only $150 toward the vacation. It really depends on where your priorities are. Sub accounts can help you break it out more effectively.

Adding an Investment Component

One of the biggest issues with saving money is that it’s hard to get the best yield when you keep the money in a high-yield savings account. These accounts are generally no such thing, and you run the risk of losing, in real terms, to inflation.

If you want to get around this, consider adding an investment component for part of your goals. I do this with my emergency fund. My emergency fund is divided into two main parts: The short-term account which has a fairly small amount, and the long-term account, which is an investing account. With the smaller portion, held in a high-yield account, I can access the money quickly when I need it. It’s enough to give me the lead time to sell investments if the situation calls for a more long-term solution.

This can be a way to help you earn a little more money, at a faster pace. If you have the financial risk tolerance, it can be helpful to invest a portion of your long-term goal money in an index ETF or in a dividend aristocrat. However, you do run the risk of loss, and you have to be careful of capital gains taxes. But, with the right approach, this can work well.

It worked for me when my basement flooded. I was able to sell stock — and I did so at a loss, so I also got a tax deduction for it — to pay the costs. Overall, the money grew (and continues to grow) at a good rate, and I could choose to sell one of my loser stocks and get a tax benefit. As long as you understand the risks, adding an investment component to your savings efforts can be a good way to boost your ROI, while still allowing you to save up for the important things in your life.

How do you manage your savings goals and accounts? Do you have a special process you follow to get best results?

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