The different kinds of savings accounts that everyone should have
In this article, we are going to be talking about something that’s pretty foundational to everyone getting better with money, but that we don’t always take time to explore in-depth. And that is the different kinds of savings accounts that everyone should have and what you should be doing with them.
And if you feel like you are someone who is really behind in your savings goals, please remember that that makes you a normal American and that Americans, in general, are struggling with savings.
In fact, 57% of Americans have less than $1,000 in savings, and 39% of Americans have no savings at all. So, I want to talk to you about the kinds of savings that you should have in relative order of importance so that you can start to think in terms of how you make your money work both shorter- and longer-term.
There’s no overnight solution to getting good with money, but being strategic and even just opening these accounts and putting your first initial dollars in them is one of the easiest first steps that you can take toward creating a life that is holistically better with money, one that’s more safe, secure, predictable, and under your control.
Savings are not just dollars sitting in an account. They’re options, they’re freedom, and they are your future. So, let’s get right into it with the four essential savings accounts everyone needs.
Number one is your emergency savings
Now, if there’s one subject that we tend to harp on more than any other, it is the immense importance of an emergency fund. And we suggest that you create this before you even start aggressively repaying debt or making any other big moves toward your financial future, because the truth is without an emergency savings account, literally any unexpected problem in your life, from losing your job to getting injured without the right coverage to even just having to unexpectedly move, can literally destroy your finances.
This money is there for you to tap into when something unexpected happens so that you don’t have to, for example, put it on a credit card you can’t pay back, borrow the money on really terrible terms, or simply not be able to deal with that problem and go into debt or collections. In the case of needing it to move unexpectedly, not having that savings could literally leave you homeless.
But despite its importance, emergency funds are not as universal as you would think they would be. In fact, only 30% of millennials have an emergency fund that can cover three months of expenses. And that is about the average amount recommended to have in this account.
It’s easy to think of, for example, in terms of losing your job, it would allow you that three-month buffer to not be evicted from your home or not be able to feed yourself. And when we say “three months of expenses,” that’s your bare minimum, just being able to live and pay your bills expenses. It’s not a fun three months.
This lack of emergency fund directly explains why about half of Americans are an unexpected $400 expense from serious financial ruin. That simple $400 expense could leave them literally unable to pay the rest of their bills, including the one they need to live in their home.
And while your emergency fund must be in a normal saving account that is totally liquid, which means you can take that money out at any time hence, break in case of emergency I recommend personally that you keep this savings account at a bank totally separate from your checking account, especially if you’re someone who, like me, has a hard time really meeting those savings goals without just siphoning off a little here and there because why not.
Having that money not be in any way attached to your card or even the bank account linked to your debit card means that you really have to go out of your way to take that money out on a day-to-day basis. And that could be the difference between keeping that $50 in there or transferring that $50 out of your emergency fund to pay for a night out with friends.
There are high-yield savings accounts options that are still totally liquid, and we’ll link you to that in the description. But do keep in mind that the most important thing is that this money be available in an emergency. So, tying it up in a longer-term, for example, a retirement account which has serious penalties to taking out the money early is a mistake.
But above all, whether you’re able to put 20% of each paycheck into your emergency fund until it’s full up or you can only afford to put in $5 a month, it needs to be your savings priority. If you don’t have an emergency fund, you should consider yourself in a state of emergency.
Number two is retirement savings
Now, I put the retirement savings account immediately after the emergency fund in terms of importance because, in addition to retirement savings being incredibly important, they’re also some of the most potentially advantageous savings accounts that you can have.
Many of them are tax-advantaged, and some of them even come with an employer match. If you are one of the people who has a 401(k) available to you at work, you should be taking advantage of it, particularly if there is a match available. And what that means essentially is that for every dollar you put into that account, your employer will match a certain amount.
If it is at all possible for you to do, you should be maxing out that match because it’s, frankly, free money. And if you don’t have access to a 401(k), there are many other Individual Retirement Accounts or IRAs available to you. And in the retirement account field, there’s actually a bit of good news compared to how not great the news is for emergency funds.
Around 82% of millennials are contributing to their 401(k)s, along with about 77% of Gen Xers. And this is great because investing early gives you one of the biggest financial advantages possible, which is a lot of time for that money to accrue compound interest. If it is at all possible, you should be contributing to your 401(k) at least to the top of your match. And beyond that, you can contribute more to your 401(k). Or you can open an additional retirement account.
There are many different types of retirement accounts depending on your needs. And you can either do that research yourself– and we’ll link you in the description to a great explainer on the different types of retirement accounts available. Or you could speak with a financial planner.
And remember that one of the most important things to keep in mind with retirement accounts is that unlike your other savings accounts, these are accounts that you should never ever touch if you can at all avoid it.
There are a few rare cases in which there is more advantage to breaking a retirement account to make a different financial decision with that money. But in the vast, vast majority of cases, it should never be done because the tax benefits that come with a retirement account only apply when you let that account come to maturity. If you take that money out early, it is fully taxed and penalized.
The entire tax-advantaged system exists so that that money will stay in these accounts for a long time, which is beneficial to the country for many reasons. Generally speaking, that money in your retirement account, while it is great to look at from time to time and watch your net worth grow and all of that stuff, should never ever be treated as money that is available to you.
And while it can sometimes feel hard to imagine as a young, healthy, sprightly, active person, you will one day be of the age where that money will be available to you and you will need it. So, a retirement account is a must.
Number three is short-term savings
Now, this is all of your savings that should be in a liquid or readily available account, but which are not your emergency fund. And it’s very important that when you are using savings accounts for short-term saving goals like you’re saving for a trip or maybe some new stuff for your apartment or even to move to a new apartment, it should never be in the same account as your emergency fund.
When those amounts are conflated, it’s easy to overdraw. And it’s also easy to not really know on a day-to-day basis what money is for that emergency fund and what money is for that goal. Many people find it very helpful to have many savings accounts for many different short-term savings goals.
And especially going in and changing those account names from some randomly generated number to the name of that goal can be very, very helpful in keeping that goal top of mind, which helps you when you’re deciding between spending $20 on some fast-fashion top or putting it toward that bigger, longer-term goal. But “longer-term” is relative, and even something that’s going to happen within a year is still considered a short-term goal in the money world.
Of course, you want to use the same strategy as with your emergency fund to find the higher-yield accounts. But they still should be accessible to you because if you need to get the money out in six months, you don’t want to be in an account that would penalize you for doing it. There are contributors who literally have up to 20 savings accounts that they’re using for tons of different things, which not only allows them to clearly see all the different goals and how close or far away they are from hitting those goals but also allows that money to be totally in clean categories and not mixed up with one another, where it’s hard to really see what money is for what.
That multiple savings account strategy is especially useful if you’re someone who has a hard time reaching your goals. The less disciplined you are with saving for specific things, the more likely you should be using each account for a different goal. And lastly, I do still encourage that you keep your savings accounts away from the bank that you use for your checking account.
When it’s super easy to just reach into that other account and grab out a little money, you will do it much more often than you think. The last category is the long-term savings accounts. Now, these are for all of your goals that are somewhere between that short-term stuff and the retirement account. Generally speaking, this is the stuff that you’re planning for about five to 10 years down the road. For many of us, it might be things like buying a home or going back to school or making some really big life changes.
And for this kind of goal, you’re going to want a mix of those high-yield savings accounts and some investment accounts which are not retirement accounts, it should be said. As Dan Kellermeyer of New Heights Financial Planning puts it, “Investment accounts should be used for savers who don’t need that money for at least five or 10 years. If you want to save for a down payment on your house in three years, an investment account may bring much higher returns. But you risk actually losing money in the market,” which is why it can be important to keep a mix of different accounts for these longer-term goals so that you’re able to better weather those potential fluctuations in the market.
For these kinds of goals and especially being strategic about the kinds of accounts you’re using, this is an area where it can be beneficial to speak to a financial planner. But if that’s something that’s not in your budget, we’ll also link you in the description for a good explainer on saving for these medium-term goals in the way that best hits that balance between higher returns and lower risk.
And whichever savings goal you’re working toward or account you’re feeding into, do remember that one of the most important things when it comes to any savings goal is to make sure that money is automatically deducted from your paycheck if at all possible. You should not see that money and have to physically move it over because, A, you may forget to do that, as many of us do. But also, B, in that actual movement, you are so easily tempted by other things that you could do with that money that would be maybe more immediately satisfying.
Any time you leave it up to human error to make sure that money gets into the right account, you’re giving it another chance to not actually make it all the way into savings. A balanced, goal-oriented saving strategy is one of the biggest keys to long-term financial health. And starting with an emergency fund and even just putting $5 a month into that account, it’s something that is accessible to everyone.
It may seem like a goal that is so far away from you today to have a healthy retirement account or a full-up emergency fund or a few different long-term and short-term savings goals. But everyone has to start with that first step and that first dollar into the account. And often, opening that account itself can be half the battle. And if you’re ever looking for more tips and strategies on how to get better with money on an everyday basis, read more articles in our blog.