When you're on a good path to building your savings, investing, or simply not over-spending, it can be upsetting when an unexpected expense derails your progress.
That's why when you're creating a budget, one of the most important things you can do is "recognize that surprises happen," says Obioha Okereke, who built a net worth of $150,000 in six years and is the founder of College Money Habits.
In order to do this, it's smart to have an emergency fund, or 3 to 6 months' worth of living expenses put away.
Be sure not to conflate your emergency fund with your other cash, though. "An emergency fund is an account separate from your regular savings account that is meant to be allocated towards helping you deal with unexpected events, like loss of a job or car trouble," Okereke says.
If you keep two separate savings accounts — one for emergencies and one for other goals, like travel or a large purchase — a surprise expense will have less impact.
Here why experts agree that you should have multiple savings accounts.
One of the least effective types of savings accounts is the "amorphous savings account," Brad Klontz, a certified financial planner and financial psychology professor at Creighton University, told Grow.
When you start putting money into a savings account with no real plan for what to do with it, "psychologically you're not very conscious about that account," Klontz says.
This can result in you feeling more comfortable dipping into that account for daily expenses, because you have no attachment to it. "Before you know it, you're spending it in ways that don't necessarily align with your goals and values," he says.
If you're withdrawing from your savings account for the odd expense here and there, you're less likely to have the funds to weather an emergency expense and stay on track with your savings goal.
Instead of having one big savings bucket that serves as your emergency fund, travel fund, and new car fund, create multiple buckets within your savings accounts and categorize them by goal. These targeted "sub accounts" are "incredibly powerful," Klontz says.
Many banks let you nickname accounts, but it may be a hidden feature, so reach out to customer service and ask.
Some banks, including Ally and Capital One, allow you to create buckets within each savings account. So in one account, you can have, say, a vacation bucket, wedding bucket, and a party bucket.
"Make a 'European 2024 vacation' account, so there's an attachment to it, something that matters," Klontz says, as an example. Then, if you wanted to withdraw funds for an impulse buy, "you'd have to consciously go rob from your European vacation account, and it's a huge barrier for people to do that."
Remember, no matter how many savings accounts you create, sometimes emergency expenses are unavoidable. Withdrawing money might feel like a setback. Don't be hard on yourself, Okereke of College Money Habits says.
"Understand that these events are out of your control and, when they occur, make sure to take a step back and evaluate your progress towards your goals and how these sudden events may have impacted your ability to achieve them," he says.
Just because you don't hit a monthly goal doesn't mean you've failed, he says: "Might you need to adjust your end of year goal? Possibly. But when the unexpected occurs, you adjust and keep moving forward."
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