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Money: Three types of Savings: If, When and Why

By now, we’ve all accepted the harsh reality that money doesn’t grow on trees.  It takes long hours of hard work to earn every dime, but it can disappear only hours after pay-day.

Financial advisor and guest iSpecialist Matt Bell shares the “If, When and Why” of saving, and I have to tell you, I’ve read quite a few savings articles, but this one really made sense.

If Savings: Planning for the unexpected

If savings are for what could go wrong.  For example:  if the roof starts to leak, if the car breaks down, and especially if you lose your job. This is your emergency fund. In order to minimize financial stress and build a solid financial foundation, keep three to six months' worth of living expenses in such a fund. If you save even the minimum threshold of three months' worth of living expenses, you will be in an elite minority, because fewer than ten percent of Americans have set aside this much in savings for the unexpected. Most people are living on the edge, which means they have to take on debt and the accompanying stress if something goes wrong.

If money is not stock market or real estate money.  It is money that has to be available if you need it, and it has to be easy to access. Put your if money into an interest-bearing, but minimum-risk account, such as a bank or credit union savings account, a money market account or a money market mutual fund. You'll get a better interest rate with a money market mutual fund; however, many require an opening balance of $1,000 or more. Also consider a savings account at one of the online banks, where rates tend to be relatively high and the minimum starting balance requirements relatively low.

You can't plan for all of life's ifs, but if you have three to six months' worth of living expenses in savings, you can cover a lot of them. Maintaining an adequate if account, adds a palatable sense of peace to your life.

When Savings: Planning for the Expected

There are three types of when savings: near-term, mid-term, and long-term.

One purpose of near-term when savings is to cover the cost of maintaining your possessions (when the car needs service) or to pay for gifts without going into debt (when Christmas arrives). Maintaining your possessions will make them last longer and save you money in the long run. It is also used for gifts, vacations and anything else you know that you'll spend money on every year but perhaps not every month.

Mid-term when savings will enable you to pay cash for things that will need to be replaced in five to ten years – perhaps an appliance, or the roof on your house. This money is also for goals you would like to accomplish within the next five to ten years, such as the down payment on a house.

Some people blend their if savings and mid-term when savings in the same account. Once they have six months' worth of living expenses in their if account, they keep adding to it, with the excess earmarked as mid-term when savings.  However, I recommend that you keep the two accounts separate. That way you'll be less tempted to use emergency-fund money for your next car. A money market mutual fund, CD, or conservative mutual fund, such as a balanced fund, are all good choices for your mid-term when savings.

Long-term when savings is for more distant goals, such as your later years, your kids' college tuition, or their weddings. If you're eligible to participate in a tax-deferred retirement plan where you work (such as 401(k), 403(b), or 457 plan), a life-cycle mutual fund within such a plan is a good option. If you don't have access to a retirement plan at work, create your own with an IRA. If you are self-employed, consider a SEP-IRA. Also, a 529 college savings plan is a good option for saving for college.

Why Savings: Planning for your Dreams

Whysavings makes it possible for you to pursue a dream connected to your true desires. If you'd like to build a why fund and you won't need the money for more than five years, you may be able to generate a better return with a less conservative type of mutual fund, such as a balanced or stock-based index fund.

Is there something you're dreaming of doing? Maybe you'd like to take a year off and travel the world with your family, send your parents on a trip as a special anniversary present, or start a foundation. Putting money into a why account each month can help you accomplish those dreams.


If Savings

Emergencies (loss of job, excessive medical or car repair bills). Bank (traditional or online) or credit union savings or money market account, or a money market mutual fund.

When Savings

Intermittent expenses (home and car maintenance, gifts, vacations) and bills (insurance, taxes).

Also for goals to be accomplished within five years.

Checking account for items you spend money on every month or two. Bank (traditional or online) or credit union savings or money market account for less frequent bills.

Money market mutual fund or certificate of deposit (CD).


Replacement of vehicles, home roof, water heater and so on. Also for goals to be accomplished within five to ten years.

Money market mutual fund, CD or balanced mutual fund.


Goals to be accomplished more than ten years into the future (later years, kids' college). Life-cycle mutual fund within a 401(k), 403(b) or 457 plan or an IRA. For the self-employed, the same type of fund within an SEP-IRA. For college funding, an age-based mutual plan within a 529 plan.

Why Savings

Dreams tied to true desires. Depends on length of time for the goal. For goals to be accomplished within less than five years, a money market mutual fund is a good option. For longer term goals, stock-based index or life-cycle funds are good options.


Related Resources:

Pillow Talk: 

Having a job is a really good thing. Do you have a job (at home) right now? Are you doing a good job? What would you consider a promotion?



Used with permission from the book Money, Purpose, Joy by Matt Bell

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