You probably agree it’s easy to save to an employer provided retirement plan (e.g. 401k or 403b) account, right? Contributions are typically deducted from your paycheck and sent directly to the plan provider. They never make it to your bank account so you hardly notice they’re made in the first place. That’s the beauty of an automated savings plan!
I want to share a practical way my family implements an automated savings plan beyond our retirement plan contributions. Several years ago, we had two bank accounts: A checking account earmarked for month-to-month living expenses and a savings account set aside for emergencies. The problem we kept running into was we never knew how much of the checking account to earmark for infrequent expenses such as auto repairs, gifts, vacations, and so on. We knew sufficient funds existed in the account to pay for these items, but we wanted to find a way to separate them from the recurring month-to-month items.
What did we do? We got a little crazy and opened six new bank accounts, each with a specific purpose. At the time, we weren’t comfortable using the various apps and online service providers that exist today to help allocate a certain portion of account(s) towards a specific goal. So we opened one account for each goal. This method has worked well for my family and we haven’t changed a thing since we began.
So why do we have eight bank accounts and how has this helped automate our savings plan? Let’s start by looking at the accounts we have:
Home and Auto Repairs
Miscellaneous Goals and Projects
Eight accounts, each with a different purpose and monthly savings goal. For those not clear what the purpose of each account is, here is a brief explanation.
Paychecks are deposited to our checking account and we use the account to pay for month-to-month expenses as well as to fund the other accounts.
The savings account is our emergency fund. One day, we hope to have it funded with twelve months of living expenses.
We turn to the vacation fund when booking plane tickets, hotels, or weekend “staycations.”
When my wife and I paid off our last auto loan, we immediately began funding a car replacement account with a monthly payment. When we purchase our next car we hope to have a sizable down payment or perhaps be able to pay for it with cash.
We don’t know what our annual home and auto repair expenses will be, but we know they will occur. We’ve made a reasonable estimate and now set aside funds each month towards the unknown expense.
My wife and I each have a life insurance policy and have elected to pay the premium annually since the insurer provides a discount compared to the monthly or quarterly payment option. We allocate funds to a life insurance account each month so when the annual premium notice arrives we have sufficient funds to make the payment.
The holidays sneak up on my family just like everyone else. As a result, we allot some funds each month to a Christmas account. When we begin buying gifts, we know exactly how much we’ve set aside to spend.
Finally, we always have some sort of short or long-term project going on and that’s the purpose of setting aside funds in a miscellaneous account.
Now that you know the purpose of our eight bank accounts, let me explain how we automate the savings to each account. Some payroll companies provide an option to have money deposited to multiple bank accounts. However, I’m willing to bet most limit you to one or two accounts. We avoid this limitation by setting up an automatic transfer from our checking account to each of the other seven accounts the same day(s) we receive a paycheck. No, it’s not exactly the same as having a retirement plan contribution automatically deducted from your paycheck, but because the money hits our checking account and is immediately transferred to another account, we never notice it in the first place.
Don’t get me wrong, this type of savings strategy WILL NOT happen overnight. You must have a general idea of how much you spend each month before you can start allocating funds in the manner I describe above. However, over the past few years we have slowly adjusted our monthly savings to each account and now understand approximately how much we spend in each category on an annual basis. This understanding enabled us to proactively save for the expenses on a monthly basis rather than wondering where the funds will come from when the expense is incurred. I have seen others apply this same technique to reserve for real estate taxes, which are typically paid semi-annually, or to meet a college savings goal.
Sometimes it seems crazy to have eight bank accounts, but it works well for my family and I’m confident it may help others!
Note: Be sure to ask about minimum account balances, transaction fees, monthly fees, etc. if you decide to implement a similar strategy. Some financial institutions are more lenient than others when it comes to these items and you’ll want to be sure you don’t incur unexpected fees as a result of having multiple accounts, some with smaller balances than others.