Then the newsflash. Nothing much seemed to happen in your savings account. Years later, here you are. After all your bills are paid and your fridge is filled, a little spending money in hand… the balance in your savings account is… going nowhere.
Now you know the hard truth. Simply opening a savings account isn’t going to guarantee you a sum of money in the long run. With interest on savings account balances at or near historically low rates, it may not seem that savings accounts are an attractive vehicle to help you save more for a stable financial future.
It’s partly true. If you don’t use your savings account properly, you can easily end up wasting money or working towards a financial future that isn’t as stable as you’d hoped. However, there are a number of things you can do to be smarter with your savings accounts so you can save more money in the long run and slowly, steadily, and surely build up a sum of money for your future.
Now we’re talking.
1. Open a Savings Account for Each Savings Purpose
Opening up multiple savings accounts may sound strange. But, it is one way to be smarter with your savings. While it may seem more rewarding to see all of your money parked in one place, it’s actually not the most effective way of managing your savings. A single lump in a single savings account doesn’t let you see clearly how close or far you are from several savings goals. It’s like saying you want to travel to the United States, but not know which particular state or city you’ll actually visit.
Instead, list your savings goals and then open up a savings account for each goal. For example, you may create accounts for vacation savings, for kids’ seasonal activities, for annual insurance payments, for Christmas and gifts, for luxury or large purchases, for purchasing your new home and if you’re self-employed, for your annual tax bill.
Having multiple accounts means you’ll be more disciplined with your money. You’ll gain more commitment to achieving each savings goal as you see the amounts grow for each purpose. And, you’ll be less likely to dip into the money that’s intended for your future or something else, especially when that unexpected large expense shows up. It means you save more for the things most important to you.
2. Automate your savings
Now to make it really simple, set up automatic transfers into each savings account for every payday. Even if you can’t put aside a huge amount, program the money to come out of your main bank account as soon as your pay goes in. This way you won’t have to think about it. The money isn’t there to spend and it won’t feel like you’re losing out. This will automatically help you to make regular contributions. Soon the money will add up and you’ll have saved more for what’s important to you.
3. Stop with mental accounting
How often do you do the math in your head? “Let’s see, I’ve got $1000 in my account. I’ve paid my bills for the month that means I can use $600 for my tax bill, and maybe we can take that weekend away… wait what was I saving for again? I don’t have extra!”
Mental accounting, or calculating spending and savings in your mind, is one of the most dangerous things you can do when it comes to your finances. It often leads to you overestimating your wealth and overspending. We’re all guilty of doing it at some point. I see this often especially with small business owners who don’t manage their money quite as strictly as they could.
By having money in separate savings accounts, you can easily keep track of exactly how much money you have for each savings purpose (such as a holiday, a new car, a new home, your taxes etc.). You won’t be tempted to overspend because you won’t see a large single sum in a single account and you won’t as easily forget one of your goals.
What steps do you take to be smarter with your savings?
If you want a nudge in the right direction to help you achieve your savings goals, give us a call and let’s talk.