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How to use targeted savings to achieve goals

This is a guest post from J.D. Roth, who founded the blog Get Rich Slowly in 2006. Roth wrote Your Money: The Missing Manual and is the "Your Money" columnist for Entrepreneur magazine. His latest project is a year-long course on how to master your money, which explains how to slash costs and boost income so that you can pursue early retirement and other goals. This article is one piece of this course.

Most people work toward several financial goals at once but keep their money clumped together in a single savings account. With this setup, it's easy to forget how much you've saved for each goal and easy to borrow money from one goal to pay for something else. I prefer a method I've dubbed targeted saving. Using an online high-yield savings account, I split my money into several different subaccounts, each of which is named for a specific savings goal. My bank lets me name my accounts and subaccounts, so I give them titles to indicate their purpose. At the moment, I have the following accounts:
  • An emergency fund and an opportunity fund.
  • A car fund, into which I make a "car payment" to myself each month.
  • A travel fund, where I set aside money for my next trip around the world.
  • A "dream"A fund, which my girlfriend and I are using to save for a vacation home.

From time to time, I have other goals that need to be funded. When this happens, I open a new targeted account (or re-use an old one). Though organizing your accounts this way might seem pointless, it can actually be a powerful motivator. For me, there are several advantages over the traditional one-size-fits-all savings method.
  • First, targeted saving allows me mold my money to my mission. Because I'm able to name what I'm saving for, I'm much more motivated to set aside money for my travel fund than I am to tuck it into a plain, vanilla savings account.
  • Targeted accounts also make it easier for me to visualize my progress. When all of my money is lumped into a single account, it's tough for me to know how much more I need to set aside for a new car, for instance. It's much easier for me to look at my statement every month and see the account labeled "Mini Cooper fund."
  • Finally, by using targeted savings, I'm able to prioritize my goals. When I decided to travel to Africa in 2011, for instance, I stopped putting money in my car fund and my emergency fund. I pumped every spare cent into my travel fund instead.

I use an online bank for my targeted savings accounts, but there are other options. Before I moved my banking online, I kept my savings at a community credit union. Despite their small size, they offered big benefits, including the ability to open several named savings accounts. (I'm not ashamed to admit my first targeted account, opened in 2006, was called " Nintendo Wii fundA.")

Obviously, you don't even need to open separate accounts to apply the principles of targeted saving. If you'd prefer, you can put your money into a single savings account while using a piece of paper (or a spreadsheet) to track which portion of your savings account is meant for each individual goal. But for most folks, it's more fun and more productive to open a separate account for each goal.

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