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.
- 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.
One final note: Especially when first developing the habit, it can be helpful to treat saving like a bill. Just as you're obligated to pay for your cell phone each month, create an obligation to save for your next car or your daughter's college education. For some, a simple calendar reminder will be enough to heed this obligation. Others might wish to create a coupon book that includes a year's worth of reminders about how much to set aside in savings and when.This is a modified excerpt from "Be Your Own CFO", the 120-page guide included with the year-long "Get Rich Slowly" course. The guide includes tips for boosting revenue and cutting costs so that you can maximize profit in order to achieve your dreams, whether those are to retire early, send your kids to college, or travel the world. Want to know more? Buy it now.