how many savings accounts, financial lifeguard, christine luken

How Many Savings Accounts Should I Have?

how many savings accounts, financial lifeguard, christine luken

How many savings accounts should I have? It’s a question I get asked quite frequently. Some money gurus advocate for just one account and others say you should an account for each and every savings goal. I fall somewhere in the middle of these extremes. Here’s my short answer: you should have at least 2, and if you’re self-employed you should have at least 3.

How Many Savings Accounts Should I Have If I Work a Traditional Job?

I advise my traditionally employed (and retired) financial coaching clients to have at least 2 savings accounts: one for emergencies and one for purchases. Your emergency savings account needs to be separate because you don’t want to “accidentally” spend that money for anything other than true financial emergencies.

I advise my clients to have at least 6 months of their household expenses in their emergency fund. In order to calculate that amount, you must be tracking your expenses via a spending plan or budget. If my client suffers a job loss, large medical bill, or other large and unexpected expense, they won’t have to go into debt to cover it. This is the purpose of the emergency fund – to put a financial cushion between you and life! You can keep your emergency fund in a traditional savings account or a money market account. Both are accessible without penalty should you need the funds.

Savings account #2 is for larger purchases you’re saving for, such as Christmas, vacation, furniture, your daughter’s cheerleading camp, etc. You are planning to spend this money for specific big-ticket items. You may also dip into this account for smaller unexpected expenses, rather than tapping your emergency fund. How much should you keep in this account depends on your various savings goals. If you’d like to subdivide your “saving for purchases” into multiple accounts, feel free! Some of my clients have a general savings for purchases account with a few thousand dollars in it, plus separate accounts for Christmas or a New Car Fund.

How Many Savings Accounts Should I Have If I’m An Entrepreneur?

 I advise my self-employed clients to have at least 3 savings accounts: one for emergencies, one for purchases, and one for estimated tax payments. I advise entrepreneurs to set a goal of a year’s worth of their household expenses in their emergency fund. Why so much money in the emergency savings account? Depending on the business, self-employed people can have periods of time when cash flow is tight and they aren’t able to pay themselves out of the business.

Having a healthy emergency fund ensures that a stretch of bad months in the business won’t ruin your personal financial health!

The extra savings account that’s needed for entrepreneurs is for estimated tax payments. Unless you are paying yourself via payroll from your company, you’ll be required to make quarterly estimated tax payments to the IRS. (If you’re not sure if this applies to you, please check with your CPA or tax professional right away!) Every month, when I pay myself out of my business, I set aside 30% of my profit in a separate savings account. This way, when my quarterly tax payment is due, there’s plenty of money in there to pay it.

I’ve coached entrepreneurs who have neglected to do this and it’s not a pretty situation! Trust me, you don’t want to owe the IRS back taxes. They have the leverage to make your life miserable. Do yourself a favor and set that money aside on the front end so you can make your estimated tax payments in a timely manner. Consult with your tax professional regarding the exact percentage you should be setting aside.

My husband and I fall into this category because I’m self-employed. We actually have 4 savings accounts: emergency fund, estimated tax payments, saving for purchases, and my new car fund. How many savings accounts should I have?  It’s a personal question that you’ll have to answer for yourself, based on your financial situation and your goals.

How many savings accounts do you currently have?

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