Why do we need so many savings accounts and funds, anyway?
Really, all of my savings = my savings.
It goes into one big category of “savings”, but within that category, I have allocated parts of my money to different priorities.
At any given time, here are the following funds I have:
- Short-Term Savings
- Emergency Fund
- Retirement Savings
- Investing Fund
- Other Funds
- PRIORITY: Pay the bills
- MONEY RISK: Very Low
I have a short-term savings fund which is just my chequing account.
I put money in here about $2000 or so, to cover bills like my rent, utilities, cellphone, groceries and so on.
It’s my daily banking account, and I keep a fairly low balance in there because I don’t want to miss out on higher interest rates by leaving my money elsewhere.
- PRIORITY: Just in case I quit my job or for other rainy days
- MONEY RISK: Low
I set aside about $50,000 in an emergency fund.
It’s enough to last me about 2 years if I lived moderately (no traveling, just living expenses). It could probably last me 3 years if I was frugal.
I used to have more money in here, but it was sitting there idly, collecting low interest rates, so I invested it instead.
Update: I have $10,000 in here now, the rest is in investments.
- PRIORITY: For the long-term, when I decide to retire
- MONEY RISK: Very High — I’m young & can weather the financial storm
I also have a retirement savings fund that is meant for exactly that: Retirement.
When I turn 65 (or younger), I will retire and have saved enough money to live out the rest of my golden years without having to ever work again.
- PRIORITY: Just to have my money make more than in a savings account
- MONEY RISK: Moderate to Very High — I want to make money & I’m young
With all of the extra savings I have set aside that are not earmarked for Emergencies or Retirement, I invest it.
I put it into index funds, no stocks (too volatile and time-consuming for me), and dividend-producing mutual funds.
Not very sexy, but I am in it for the long-haul.
Normally people might put this money in a down payment towards a house (physical investment), but I am not really someone who wants to be tied down to a property anywhere…. yet.
I am also not entirely convinced a house is the best investment you can ever make; perhaps it was true 50 years ago, but today, times are different and the answer is: it depends.
Therefore, I just invest the money into index funds rather than put it into a house.
- PRIORITY: For spending on life
- MONEY RISK: Low — I want the cash there to be used!
I usually always set aside some money every year for things like traveling (about $5000/year). It’s what I like to do, and it is best done when I have the cash to do so.
No guilt here!
Some people use this as a “BUY A HOUSE” fund, or a “BUY A CAR” fund.
It’s whatever you want, but make sure it makes sense for your lifestyle.
It’s all savings in the end
It might seem confusing to have money allocated everywhere, but each fund and account has its own priorities and risks that makes sense to me, as it is my money.
For instance, I wouldn’t want my emergency fund money to disappear over night, when I need it the most, just as I wouldn’t mind terribly if my investments or retirement took little dips along the way, because I’m investing for the long-term and I wasn’t planning on needing the money tomorrow, anyway.
Regardless, the only thing you need to remember from all of this is: START SAVING.
After you amass a nice little amount of $5000 or more in your bank account, start thinking about what you should earmark that money for — emergency fund? retirement? — and go from there.
You will learn slowly what you want to do with your money, as you start to get more and more interested in it.