We have four types of savings:
1. Overdraft (free)
~ $500 in savings account directly linked to checking account...I used to leave a padding of $1000 in the checking account when interest rates were better...and this savings was #2 below
~ same credit union for both accounts; both accounts earn interest, but savings earns 3-4 times the checking
~ no fees, auto-transfer to cover any overages, no thinking involved
~ transfers are immediate and both accounts are easy-access (online, phone, in person, walking distance to branch, branches all over the country, cash over at grocery stores)
~ When money is auto-transferred to checking (in overdraft situation), I transfer it back to savings after the next payday online. It is a cashflow issue right now because we are focusing on paying off our mortgage by the August before our DD is most likely to go to college. I have changed all of the due dates I can at this point. Since it doesn't cost us anything, I let it go. We're allowed up to 6 transfers between these accounts per month and we generally have zero or two.
~ used in a year or less
~ We generally trade off on home improvements (we bought a fixer-upper 11 years ago) and vacations (modest). When we weren't saving for these, they only happened under extreme circumstances, which caused undue stress.
~ online savings account connected to checking account
~ automatic savings program (monthly; no thinking involved) and I change the monthly transfer amount once or twice a year to reflect goals for that year
~ Money transfers either direction takes a few days, which forces us to think ahead a bit -- always a good thing, IMO.
~ systematic investing program (monthly; no thinking involved)
~ We only have access to IRAs at this time, so we save the maximum allowed by law for each of us.
~ DH has one professional account with multiple mutual funds we buy/invest monthly. (Some are at NAV and some have fees.)
~ I have one professional account with multiple mutual funds we buy/invest monthly. Mine are all at NAV (net asset value, which means no fees) since I used to work in securities.
~ I have one self-directed account with an ETF we buy/invest monthly for a nominal fee. (All trades were free the first year - 2010 - and I decided to continue it due to performance.)
~ for use for anything between one year and retirement (20+ years away) or beyond
~ generally thought of as our "emergency fund" in this forum's context, but I think of it (or a chunk of it) as our supplemental retirement savings at this point
~ We have this category of money in several different places...diversification is key to me! I have a higher risk tolerance than the average American because of my education and experience (degree in finance; many years of working in banking/securities). The types of accounts and percentages of money in each type has changed over the years due to the financial climate changes. We have stocks, bonds, mutual funds, exchange-traded funds, money markets, and online savings accounts. We probably even had a CD at some point in the early days, but I generally don't like those due to lack of liquidity and low rates these days.
~ We grew this very slowly after the other savings above (#1 and #3) were established and being funded adequately (not at maximum). I literally started simply by having our checking account keep a minimum of $1k at the end of every single pay cycle, growing it slowly. At that time, though, we both had 401k programs through work and we were both contributing. Once we met my minimum $1k balance at every pay cycle, then we started increasing our 401k contributions up to the maximum for best employer-matching (different for each of us). Only THEN did I work on this type of "mid-term" savings and it was just in the regular savings account back then.
~ We started with a goal of 3 months worth of essential living expenses and it took awhile! Essential living expenses to us are the things that must be paid at least for a few months while the "emergency" gets sorted out. It is challenging to just drop every bill/service just because of an "emergency". You don't always react quickly and cancel all non-essential services/bills because not all "emergencies" are instant. Job loss can even be dragged out; hours cut or pay rate reduced; or severance paid for awhile. Disabilities don't usually show up immediately, either, but rather after many medical treatments (and BILLS). On the flip side, some things seem like an emergency but could really have been absorbed into the budget/spending plan. So you didn't really need to stop the service, but you did and then you have to pay extra to have the service restarted, etc. Bottom line is we went by net pay minus savings plus 401k deductions for the first phase. For example, say direct deposit paychecks totaled $2000 per month and savings were $200 and 401k deductions were $150... $2000 - 200 + 150 = $1950 x 3 = $5850.
~ Once we hit the 3 month mark, we never let it drop below that dollar amount. We used some of money to pay for a new car when the transmission blew on DH's car and we were both working. Neither carpooling nor public transportation were an option at that time. (We were borrowing a friend's car as it was for a month while the "emergency" was sorted out.) We had more than 3 months in this fund and only used up to that 3 months worth mark...not a penny more.
~ Our next goal was 6 months worth of essential living expenses. This process picked up speed due to compounding interest and focused attention.
~ Once we hit the 6 month mark, we never let it drop below that dollar amount. My car needed replacing at some point after this and we repeated the above. Compounding interest and the habit of saving really paid off by this time. Somewhere in here, we also re-evaluated our definition of essential living expenses. I literally went through our exact spending plan (average monthly amount based on the coming year) and calculated what dollar amount for each line item would be required in an "emergency" situation. Gas would drop, but car repairs would not. Our vehicles are older and we need to maintain them well. Auto insurance and registration would stay the same more or less. Personal funds for each of us could drop immediately, but it depends. DH's is direct-deposited via payroll. If he lost his job and continued to receive severance, then it would continue. (It takes 1-2 paychecks for changes to take effect.) DD & I receive our cash portion via a monthly walk to the local branch, which simply wouldn't happen. My investing play money, though, is auto-transferred and takes a few days...timing would play a part in how quickly that would be discontinued. DD's college savings would only be changed under dire circumstances. All the nuances are taken into account and we reached a minimal monthly dollar amount. I use that new number for all my "essential living expenses" calculations now.
~ Our next goal was 9 months worth of essential living expenses due to the "new" financial climate. By this time, our income had gone up nicely and ironically this process took awhile until I specifically pointed us in this direction at the exclusion of most other discretionary spending. This really required a LOT of focused attention towards savings and ignoring our rising income and status of living, etc. We have experienced double job loss back during the previous recession and survived well due to our savings, so I was motivated to catch us up to those standards at current market conditions. Thankfully, we didn't need the funds.
~ It took us a really long time to get to a full year's worth of essential living expenses. Our income now makes this challenging. Plus, the changing financial climate has sent interest rates plummeting and investment returns are soooo low that I have had to spend a lot more time managing these accounts. One might think this would be more motivating and they'd go up quicker due to the attention. Hmmm.... Not so. Instead, I watched how pathetic they grew despite throwing money at these accounts and chasing the highest interest rate, etc. The majority of these funds are in very stable, fully insured accounts. A certain percentage, however, is not and that chunk fluctuates so much that we've just been hovering at the 12 months worth amount for a year or so even though we still contribute monthly to the very stable portions (at much lower dollar amounts now that we've turned our attention towards paying off the mortgage in less than 8 years).
I want to point out that we had consumer debt at various points in our financial progress. I believe building savings is just as important as reducing debt once you have it. If you never get into debt, then that's even better. Unlikely for most people, but it's all relative.
Super long....I hope it helps someone! I appreciate the experience of thinking it all through and typing it all out. Best wishes to all!
Edited by sunnysandiegan - 10/1/11 at 10:12pm