May 7, 2010Checking and Savings Accounts
Checking and Savings Accounts
The Dollar Stretcher
by Gary Foreman
Dear Dollar Stretcher,
My wife and I will be needing a car soon. I want to know how I can go about saving for it. Also, for buying special items for the house, should I use my savings account at my bank? Is it wise to use my checking account for monthly expenses only?
AC packs a lot into one paragraph. And, he's right in assuming that how you handle your money will make a difference in how much money you have.
Many families invite money troubles by keeping all their available funds in a checking account. Money flows in and out without much thought. It's certainly a convenient way to handle your money. But, not the best way to manage it.
Aren't we making a big deal over nothing? No. A good system for controlling your money can save you time and make you money. It can provide helpful information at a glance and keep your money from disappearing. It's the first basic step to controlling your finances.
Think about how your life works. Your expenses could be divided into four categories. Monthly routine bills, larger expected bills (like vacations), larger unexpected bills (like auto repairs) and very large expenses (like a house or car).
Just as there are different kinds of expenses, the money that's used to pay for them should be handled differently. And AC has a pretty good system started.
Let's flip his questions around and look at the last one first. Yes, it is best to limit your checking account to paying regular monthly expenses. There are a couple of reasons why that's true.
It's easy to write a check to pay a bill. That's good. But that easy spending can be bad. If you're saving money for a new stove you don't want the money too accessible. Temptation could make it easy to buy a fishing rod or theatre tickets.
When money is real tight it might be necessary to keep everything in a checking account. Naturally, the risk is that the money tends to disappear making it harder to save.
AC is doing the right thing by putting some money into a savings account. Taking it out of the checking account protects it. If AC wants to dip into savings for a special purchase he'll need to consciously make a decision to take the money from the savings account. The money won't disappear a little at a time.
The 'big expense' money needs to be safe and reasonably available. It's helpful to be able to know how much money you have available for the unexpected. Most people use a savings account or money market fund.
And since you don't routinely dip into savings, a look at your account balance will quickly tell you how much you have for the home insurance or auto repair bill.
If AC is saving for a new car he might even want to set up a separate savings account just for that purpose. In fact, watching the balance grow could be a way to encourage him to save even more.
Making use of a savings account or two along with his checking account could definitely help AC keep track of his money. It could also help him to accumulate it faster.
Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website
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