Many doctors may have competing short-term goals; saving for the down payment on their first home, a big vacation, new furniture, etc. Many people are comfortable maintaining one account for their emergency/opportunity fund and directing monies to this account systematically each month or when cash builds up in their checking account.
For others, though, one lump sum of money sitting in an account doesn’t help them to determine whether they can afford each of their goals or even reach their goals to begin with. For those clients, I tend to recommend a strategy of using multiple accounts to accumulate the funds to meet each goal.
If you prefer the multiple account strategy, I have a few suggestions you may find helpful:
- Determine the purpose of the money. Most people should have an emergency reserve of 3-6 months of income, depending on their personal situation. Start with this fund and list the other purposes.
- Determine the amount you need for each goal. Write down the expected amount for each goal and be very specific.
- Determine the time horizon for each goal. It is important to identify when you will need the money, so you can determine how much to set aside each month to reach that particular goal.
- Determine your monthly excess cash flow. After your fixed and necessary variable monthly expenses, calculate how much money is left over each month to put toward savings goals. I highly recommend a budgeting exercise; however, if you haven’t done one and choose not to do a budget, perhaps you know how much your checking account builds up each month. If so, unless you alter your spending habits, this is your monthly excess.
- Determine where to put the money. This will vary by person or family depending on income, time horizon and risk tolerance to name a few. If you are incredibly conservative and reaching the goals will be close, multiple accounts that preserve the monies are probably best.
If, on the other hand you are much more aggressive, are comfortable with delaying the goals due to a decrease in principal or have a longer time horizon to meet the goal, you may want to consider other investment options.
It’s important to remember online savings accounts tend to pay a higher interest rate than typical brick-and-mortar banks, so it is beneficial to do some research unless you already have a financial advisor. They should know which options are best or be able to find out for you. Your financial advisor can make recommendations based on your overall comfort and knowledge of investments.
