Many people think of a savings account simply as a place to stash emergency funds for a rainy day. However, savings accounts are the perfect place to save money for big purchases, such as a home or a car.
Having multiple savings accounts can help you keep track of how you’re doing with your individual savings goals. A single savings account may make it harder to tell if your individual savings goals have been reached.
Here are five reasons to have multiple savings accounts.
1. Set targeted savings goals
Fuzzy savings goals usually don’t pay off. Without targeted savings accounts, people are more likely to raid their emergency savings funds for big purchases.
Instead, targeted savings goals spur good behaviors because they give people reasons to monitor their spending patterns to meet their goals.
But before launching into any savings goals, first build a strong foundation. Pay off any short-term debt such as credit cards.
Greg McBride, CFA, Bankrate chief financial analyst, advises people to stash six months of savings in an emergency fund.
“Breadwinners will need larger savings accounts of nine months to one year,” McBride says.
2. Set up automatic savings deposits
Save early, save often and save automatically, says Robert Laura, president of Synergos Financial Group in Howell, Michigan. To feed savings, sign up for free direct deposit and automatic withdrawal at your bank, so you’re not tempted to spend the money.
Online banks also offer multiple accounts, letting you quickly move money from checking into savings and back, Laura says. Some online banks even link to outside-bank checking accounts. However, transfers can take two to three business days.
3. Track your progress
Having multiple savings accounts for different goals can help ensure you’re adequately saving for specific goals.
“I’m a big fan of behavioral tricks when it comes to money,” says Charles A. Levin, certified public accountant at Levin Financial Planning. “So if you call it the vacation account, then your head treats it that way. If you call it the down payment account, your head treats it that way.”
If your emergency savings fund goal is $6,000 and your vacation goal is $2,000, separating the two into different savings accounts could make it easier to see whether you achieved a goal and that your money is still in the proper account.
Each savings account should have its own clear goal. You can track savings with an online bank account where you regularly can view your balance.
Bankrate has a Home Budget Calculator that can help you manage your savings and expenses. It allows you to input food and general expenses, fixed expenses such as a mortgage or auto loan payment and other expenses as well. When you’re budgeting, consider using an app or website to make the process easier. For example, Mint will automatically keep track of debits and credits so you don’t have to manually input them.
Don’t forget to review your goals each month to see if you’re on track. “If you aren’t meeting them, be willing to adjust them,” Laura says. “Life happens. Don’t be upset.”
4. Prioritize your savings goals
Some goals can be fast-tracked over others by using targeted savings accounts. They make it easier to meet goals than by just lumping money into one big account.
The reason: Goals, and the amounts of money to meet them, can be clarified. The key is breaking up goals into bite-size segments, Laura says. Then deposit specific amounts of money into each of your targeted savings accounts to meet your goals.
“If you need to save $500 in six months, how much money do you need to save every day?” Laura says. “This way, your goal is in the forefront of your mind.”
Once you accomplish one savings goal, divert overflow money into another targeted account to meet another goal.
Before increasing your savings deposits, plot your monthly expenses. Budgeting apps can help you create budgets, monitor spending and track savings to stay on top of how much you save versus how much you need for bills.
5. Online banks offer multiple accounts
Many online banks offer multiple account tools. You can open multiple savings accounts and then label them with goal names. Account balances show up on your banking home page, so you can track their growth.
Having your money at more than one online bank can be a great way to try different banks and also make it easy to leave another bank. For example, if one bank were to significantly lower its APY and your other bank didn’t, you could easily transfer the money to the bank with the higher yield. Always communicate with the bank that you’re closing an account. If you empty the balance, you may incur fees at some banks.
Using more than one online bank can also help you have the best of both worlds. For instance, if one bank has ATM access for its savings account and a lower APY while the other bank has a higher APY, you could put the smaller balance in the former bank and the bulk of the money in the latter bank.
Avoid savings accounts at banks with minimum balance fees, McBride says. “Incurring only one could wipe out your earnings for several months,” he says.