We all know that we should be saving money for random expenses and things we just want, like a new home or vacation. But actually figuring out how and where to save your money can be a challenge. Many of us just try to spend less and let the balance in our checking accounts increase. Then, when the bill comes due, we almost have heart failure as that amount drains out of our account. We feel more insecure when suddenly we have less money than before and we’re never sure if we’re going to have enough when the refrigerator suddenly stops working. 

The good news is that there are two excellent systems for managing your savings for random expenses and other goals. For more information on identifying goals, calculating how much to save each month, and putting your system in place, check out this post. Here’s a more in-depth analysis of two ways to manage your savings.

Option 1: Use a budgeting or money management tool

Budgeting apps have completely revolutionized the personal finance realm in the last decade or so. Before, you had to have separate accounts, be super spreadsheet-savvy, or have an amazingly detailed and time-consuming paper system to organize your money by goal. Now, it is so much simpler! 

Apps and websites like YNAB (You Need a Budget), EveryDollar, or Mint.com help you create and allocate money toward specific goals. You are essentially putting your money in an online bucket. Typically, all you have to do is set a budget for a particular goal, enter the amount and date the funds will be needed, and then set up recurring transfers to help you meet that goal. It’s a virtual accounting system for all of the money in your checking and savings. 

Advantages

This system is great because it is easy to set up and requires very little ongoing management. You can log in and see everything in one place rather than logging into different accounts. Although they may take some getting used to, most people find that these apps work very well and take a lot of stress out of keeping track of everything. If you’re the type of person who wants to keep things as simple as possible and likes using apps, this is a good solution for you. 

Disadvantages

Separating your funds in your app, but not in your savings account can create a false narrative in your brain. You might feel more insecure when the balance in your account goes down even though you technically have a plan. If you have a hard time paying for large purchases even if you’ve saved and have the money for it, you might benefit from actually having your savings in separate accounts or subaccounts. 

For others, seeing all of the money you have in one place makes it too easy for you just to spend it all. It can be a little too easy to reallocate the money you’ve saved for one thing to something else. Maybe you’ve been saving for future home repairs, and the app has allocated money toward that goal, but you look at your account balance and see lots of money and think, “I have enough money for this new couch I want.” Then, poof! It’s gone. 

This might also not be the right plan for you if the idea of figuring out yet another app or computer program is overwhelming, and you know you’ll never actually use it. 

Be honest with yourself. You’ll know if this is the right option for you. 

Option 2: Create separate savings accounts

Instead of just reassigning the money into virtual buckets, you can set up separate savings accounts for each goal. For example, you might have one for your emergency fund, one for the downpayment on a house you’d like to buy, one for home or car maintenance, and one for vacations. 

With this method, it’s best to start with just a few accounts and make sure they’re getting funded. The risk of setting up too many at once is that you’ll be overwhelmed with trying to fund them all and end up funding nothing instead. 

While it may be easiest to set up additional accounts at your current bank, you can also consider opening online savings accounts. These are easy to use, usually have lower fees (if any), and often pay a higher interest rate, making it possible to grow your savings a little faster. Additionally, having them at a bank that is separate from your checking account makes it a little more “out of sight, out of mind” so you’re less tempted to “borrow” from them. 

Many people like Ally Bank or the Capital One 360 account that allows you to have subaccounts. (I’m not getting paid to endorse these and do not use either of them.) A simple search for “best online (or high-interest) savings accounts of 202x” will give you some additional options. 

Advantages

Once you set up the accounts and automate the transfers, additional savings accounts are incredibly easy to manage and take away some of the temptations of using the money for something else. And if you don’t look at the balance for a while, you might be pleasantly surprised to see just how much you’ve saved already!

Disadvantages

Sometimes multiple savings accounts can be overwhelming to manage. If you have accounts in different places, you need a good system to keep track of where the accounts are, how much is in each one, and how to log into the accounts. If you have too many of them, it can be hard to figure out what to save for first. Additionally, you’ll have to move the money back to your checking account to pay the bill. 

*****

Having multiple savings accounts tends to work better for most people, especially because it can be so hard to watch your overall bank account decrease. However, the right answer will be different for each person and you have to make the choice that is right for you. Even a pencil and paper or a spreadsheet can be a valid option if that’s what you like to do. Whatever you choose, you’ll feel a lot better about spending money when you have a plan.