Are You Saving Enough? Consider Building These 4 Savings ‘Buckets’
You know it’s important to save money. You’re just not sure if you’re stashing away enough. Are you prepared for life’s twists and turns? Or could an unexpected bill potentially derail your finances?
The Consumer Financial Protection Bureau (CFPB) suggests that people maintain four savings “buckets” — one for recurring quarterly or annual expenses, one for unexpected expenses, one for job loss and one for goals. If you can’t cover these four buckets, you may not be saving enough. Here’s more about why it is important to save for each of these areas.
1. Annual or Quarterly Expenses
You can cover your monthly bills, including your rent or mortgage, utilities, transportation and groceries. But you feel stressed by annual expenses, such as holidays, birthdays, summer camp and back-to-school shopping. When your heating bill starts to spike in the winter, you feel chills that are not just from the dropping temperature. This is a sign you may not be saving enough.
Your budget shouldn’t consist of only monthly bills. You need to be able to cover for recurring quarterly, biannual and yearly expenses. If your family spends $1,200 every summer to visit your relatives, for example, you may want to save an extra $100 per month toward this annual trip.
You can also ask service providers for more uniform billing options. If your utility bills spike in the winter, for example, you could check with your providers to see if they offer a budget billing plan in which participants may pay a consistent monthly amount based on projected energy use. Bills are adjusted periodically based on actual use. These may help smooth the peaks and troughs.
2. Irregular Expenses
Eventually, your car will need an expensive repair. Perhaps you’ll need to replace your timing belt, or maybe you’ll need a new clutch. You don’t know when this will happen. You don’t know how much money this may cost. But you know that at some indeterminate point, you’ll need to repair your car. If you’re a homeowner, you’ll eventually need to replace your furnace or buy a new dishwasher. You don’t know “how much” or “when,” but you know these types of expenses are inevitable.
If you’re not prepared to cover these costs, you may need to start increasing your savings. Consider creating an “irregular bills fund,” to which you contribute money to help cover repairs, maintenance and other irregular expenses. Set aside part of every paycheck for future veterinary bills, car repairs and new appliances.
3. Emergency Fund
Imagine that you and your spouse both lost your jobs at the same time. How long could you live on your savings? Your answer may depend on the size of your emergency fund. An emergency fund is money that you set aside for unpredictable, once-in-a-lifetime emergencies, such as job loss or a health emergency. It should cover at least three months’ worth of living expenses, according to the Financial Industry Regulatory Authority (FINRA).
In 2015, 54 percent of U.S. households didn’t have enough savings to cover three months of expenses, according to the FINRA Investor Education Foundation’s Financial Capability Study. Individuals without emergency savings, the study said, “lack a buffer against unexpected financial shocks.”
To start building an emergency fund, consider opening a separate savings account. Make a “payment” into this account every month, as if you’re paying a bill. By housing your emergency fund in a separate account, you might signal to yourself that this fund is reserved only for dire situations.
4. Financial Goals
The CFPB also recommends setting aside enough money to help pursue your goals. If you hope to retire at age 62, attend graduate school or start a small business on the side, consider putting away money that can help you build these goals.
Consider keeping this money separate from the rest of your savings. By building “buckets” for every savings goal, you’ll be able to monitor whether or not you’re on track.
When you’ve built a comfortable savings nest, you may be better prepared for life’s curve balls. You may also enjoy the peace of mind that comes from knowing you can handle the unexpected and still pursue your dreams.