We often think of an emergency fund as the only savings besides retirement savings that we need to be building. If we want to truly live a less stressful financial lifestyle you should be building at least 5 types of savings besides your retirement fund.
What is the very first savings fund to build?
It is the everyday emergency fund for those unexpected expenses that might include car repairs or home maintenance. This is the fund that you will likely use the most because these are the type of emergencies that are most common. Having a little more access to this account is helpful because of the frequency you might be using it.
How do you distinguish this from the traditional emergency fund definition?
The most common definition for emergency fund is one that is used for catastrophic events such as a sudden loss of income where you need to cover monthly expenses for an extended period of time. The balance will be need to be much larger than other funds however it won’t need to be readily accessible because you normally have ample time to access the funds.
Is there a third emergency fund to build?
Yes, this is the savings for unexpected health related expenses and these funds should be saved in a health savings account. The value of the HSA is two-fold, contributions are pre-tax and earnings are also tax free. As long as the funds are used for medical expenses there won’t be any tax consequences on the withdrawals.
What is another important savings account to have?
One of the most important for everyday living is the fun money account. Budgeting and saving for fun from small self-indulgences to memorable family trips is important. This savings account might be the most used account and the one that creates so many important memories.
Is there an account that not everyone will use all of the time?
Yes, the special occasions account. If you have milestone events such as weddings, birth of child or anniversaries to celebrate, building a savings account to offset these expenses is extremely important. It will ease the impact on your financial situation and help you avoid building debt for these events.
Building all of these savings funds will take discipline, planning and sacrifices in other areas however, everyone who builds these accounts never regrets the decision.