Planning for Future Expenses with Savings Buckets
What is a Savings Bucket
A Savings Bucket (aka a Sinking Fund) is a savings account that you’ve dedicated to a specific savings goal. For example, you might start a Savings Bucket for an upcoming vacation, and transfer a certain amount to it each month up until the trip.
Why Should I Have One?
Separating out the money that you intend to use for a specific purpose, makes it easier to save for specific goals. It’s more motivating to save for something specific, rather than just trying to generally “save more”.
How Does It Work
First, you will want to open a new savings account. Then you decide how much you want to contribute each month. There are two ways to approach your contribution amounts.
One way is based on what you can afford. Looking at your current expenses, how much do you have left over each month? And how much of that do you want to dedicate towards this goal?
The other way is to think about your goal dollar amount and your timeline. If you are saving for a vacation that is 5 months from now, and you want to have $2,000 you can dedicate to the trip, then you know you need to put $400 a month into the account ($2,000/5 months = $400/month).
If you are saving for a goal with an unknown timeline, it is a little trickier to plan out. If you’d like to have $1,200 in a car maintenance fund, contributing $100/month will ensure you have $1,200 to spend annually. The complication here is that you may need new tires within the first month, at which point you only have $100 in the account. In this scenario, you can opt to stick with the $100/month plan, and if you are unlucky enough to have a bigger expense the first month, well, at least you have $100 already saved, which is better than you’d have been before starting the savings bucket. Or, you can opt to make larger contributions in the first few months, and lower the amount once your account has reached a certain minimum threshold.
Is This Different than an Emergency Fund?
An Emergency Fund should be set aside for things like a job loss or medical emergency. It’s a safety net to protect yourself when life doesn’t go as planned.
A Savings Fund is focused on irregular, but anticipated expenses. You could be saving for a major purchase, like a down payment on a house, furniture, or an upcoming vacation. Or you might have an account for inevitable expenses like car or home repair, or pet care. While a broken water heater may feel like an “unexpected expense”, the fact that you have at least SOME home repair expenses each year is fairly predictable.
Can I Have One Account for All My Savings Goals?
Technically, yes, you can have all of your savings lumped together in one account. However, when you separate your savings goals into separate accounts it makes it much easier to see how much you have available for each purpose.
For example, if you want to buy a new couch, it’s hard to know how much you can actually afford at any given moment. You may look at your general savings account and see that you have $20,000 and think “great! West Elm here I come!” forgetting that you had mentally earmarked $15,000 as your emergency savings, $5,000 for a down payment on a new car, and $2,000 for the flights/hotels/gifts for the 3 weddings you are attending this summer. When it’s all lumped together, we tend to assign too many jobs to the money we have. But when it’s broken out into separate accounts, we can clearly see what our intentions were for each dollar.
Now, you can always decide that actually, I’d rather buy the couch, even if it means I will need to delay the new car purchase. But by having to actually transfer your money out of the Car fund, you are making a conscious decision to prioritize this new goal, at the cost of the goal you’d previously identified. That extra step may be enough to make you reflect if this new goal really is the priority.
What type of account should I open?
If you are saving for a short-term goal (a year or less), opening a savings account (or multiple, yes, you can have several savings accounts) at your primary bank is probably going to be the easiest. This makes it really easy to transfer money back and forth.
Opening a savings account at another bank, or an online bank, can be a great way to put a little distance between you and your savings. If the money is at a different bank, it often takes 2-3 days for it to be transferred to your checking account. For some people, that delay helps disincentivize them from dipping into the account for things outside of their intended purpose.
For longer-term goals, especially those with higher dollar amounts, a High Yield Savings Account (HYSA) is the way to go. As of this writing, you can earn up to a 4.5% annual interest rate with an HYSA. While that’s not going to make you rich, there’s no reason to leave that money on the table.
Where should I open this account?
If you are looking to open an account, outside of your primary bank, make sure there are no fees or account minimums. Also, make sure the bank is FDIC (or NCUA for credit unions) insured. That means that if the bank were to declare bankruptcy, the US Government would insure your balance, up to a max of $250,000 per person.
Capital One 360 is a popular no-fee, no-minimum option.
Ally Bank is an online bank that offers a “savings bucket” feature. Essentially you open one account and then create sub-accounts dedicated to each of your savings goals.
For HYSAs Marcus by Goldman Sachs and American Express Savings are two banks that consistently offer some of the most competitive rates.
Make it Fun
Most banks allow you to give your account a “nickname”. Giving your account a name that excites you, makes it that much easier to consistently save for the goal. Transferring your money into Account 1490 isn’t nearly as fun as transferring it to the Mexico account, or better yet, transferring it to the Margaritas on the Beach account. Get specific. You can always rename the account for your next trip or next goal.
It’s Ok to Adjust the Plan
It’s also ok to change your mind down the line. You may have been saving towards a new car down payment, only to decide that your priorities have shifted. You are allowed to reallocate that money as your goals and priorities change.
However, if you know you have a history of draining your savings for impulsive purchases, you may want to set some rules for yourself. For example, you can only pull a certain percentage out of an account for something not connected to that goal, or you have to wait a certain amount of time for purchases.
Anticipate the Irregular Expenses
When you are better able to anticipate your irregular expenses, it becomes much easier to create a plan for them. Learn more about how to effectively anticipate and manage the less consistent expenses in your life.
