The Three Savings Accounts You Need Part Three: Goal Savings

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Once you have managed to build up the emergency savings account that you need and have a consistent retirement savings plan in place, it’s time to work on the last part of your plan—saving for a specific goal.

I find that if you don’t do this separately, it’s really tempting to dip into your emergency savings for expenses that you know are coming: a down payment on a house, a vacation, and so on. The idea of the emergency savings account is that the money there is for unexpected expenses and emergencies. If you keep dipping into it for other types of expenses, you’ll spend your whole life replenishing your emergency savings account and never move on to real wealth building.

So, I suggest having a totally separate account that you use to save up for things that are outside of your normal expenses but that you know are coming. Psychologically, putting the money into a different account can help give you the discipline to avoid dipping into your emergency savings when you don’t really need to (remember that whole mental accounting thing we talked about? You can make it work for you by playing mental tricks on yourself like this).

Let’s take a deeper look at what it means to save for a goal.

What is goal saving and how do I do it?

I know that “goal saving” is not a particularly catchy name, but this is an important savings pot. This is the money that you’re saving for things that matter to you. For example, you may be saving for the down payment on a house. You may be saving for a delightful trip to Europe. You may be saving for the breasts you’ve always wanted. You know what you want. This is where you save to get it.

In a lot of ways, it’s much easier to save for something you really want than it is to build up your emergency savings because, well, this is something you really want. Every penny you add to this account is a step closer to a dream.

One of the best way to approach this type of saving is to start by writing down exactly how much you need to save. Let’s say you’re saving for a vacation (this is something I can really relate to). Take a look at flights and Airbnbs or hotels, work out what activities you want to do while you’re on your trip and how much they’ll cost, and think about your plan for meals—will you cook in your Airbnb most of the time, or mostly eat out? Add up all your anticipated expenses, and you’ve got your target amount. Let’s say it’s $3,000.

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The next step is to think about when you need the money. You may already know the exact date of your trip, or you may be thinking about next summer’s vacation. Either way, you’ll want a rough idea of your deadline.

The final step is to figure out exactly how you’re going to save up the money. Will you put a certain amount towards this goal every month? Will you dedicate most of your annual bonus to it? What expenses can you cut back on to free up the money you need? Write down your plan in detail, this can make it much easier to stick to.

I would be remiss if I didn’t point out that there is another option for goal saving, which is something that I typically do. This is where you perpetually save for a goal that you regularly have without a specific plan. Let me explain.’

Travel is important to me, and is something I try to do at least once or twice a year. Often my trips are fairly spontaneous, so I don’t usually know six months beforehand that I’ll be going somewhere. So, what I do is devote a proportion of all my spare cash and unexpected windfalls to a travel savings account. That way, when the urge to travel hits, I have money saved up and waiting. This can be a good tactic for saving for a down payment on a house. You don’t know when the perfect home will come along, or exactly how much money you’ll need. Devote as much spare cash as you can to your down payment savings account, and when the time comes, you’ll hopefully be ready.

Where do I put this money?

My advice here is broadly the same as my advice for your emergency savings account: find something that offers a balance between return and accessibility. Because this is more medium-term saving, you can probably get away with using a short-term certificate of deposit (CD) if you have a lump sum to save, otherwise you can use a regular savings account with the highest rate you can find.

If you can master these three savings accounts: emergency savings, retirement savings, and goal savings, you are going to be well on your way to financial happiness.