This article is by editor Linda Vergon.

About four years ago, Breezy and her husband opened a checking account at their local credit union so they could save for car-related payments – insurance, gas, repairs, and the like. They liked how it allowed them to separate these expenses from the rest of their spending. Soon, they established more funds.

Right now, she and her husband have four sinking funds and she is considering adding another. The way they currently have their accounts divided is:

  1. Celebrations (holidays, birthdays, weddings, etc) – checking account with credit union
  2. Car repairs (and eventual car replacement) – checking account with credit union
  3. Medical expenses – HSA account
  4. Home improvement – savings account at a bank.

But managing the different funds is becoming a bit of a nightmare. Sometimes she finds that too much has built up in the car repairs account and there’s not enough in the home improvements account, so she often borrows from one account to take care of an expense in the other. In addition, she has a new goal.

“However, now I feel the need for more sinking funds to save up for some larger expenses, such as a vacation or a new car, but I’d rather avoid having five different accounts. I was wondering how other readers might manage this situation. I would like to add a vacation account for a trip that we are planning to take in about two years. But, I’m not sure [about] what is the best way to save up for that expense.

“How can I determine a healthy balance for each area? Is it best to keep the balance in a savings account, checking account, cash, or other?”

When Andrea wrote asking how much to keep in an emergency fund, J.D. Roth’s advice was to “do what works for you. There is no one right answer. Examine your situation – your income and your needs – to decide how much you should save.” And in the comments, Dylan also had a good suggestion for how to determine a healthy balance:

“Here is an easy (maybe even fun) way to ‘crash test’ your finances. Make a copy of your Quicken, Money, Excel worksheet, or grab a blank check book register and simulate emergencies. Try injuries, illness, job loss, car gets stolen, day care evaporates, part of your house requires repairs, legal fees to mount a defense, whatever you can think of. You may need to do a little research, but this can help give you a sense of what your cash flow needs might actually be so you can plan accordingly.”

As for the best type of account to use, Breezy says they do not use an online bank currently, but they are open to the idea if that’s an easier way to manage multiple funds. Once she establishes the “healthy balance” for each fund, she could build funds in an online account and then transfer amounts over to a certificate of deposit (CD) periodically, staggering the terms so they mature at the right time. This suggestion is a little more complex; but for her trouble, she’ll probably earn a little better interest over the next two years.

How do you determine how much to save, and how do you manage multiple sinking funds? What type of account should she use to save up for her vacation?

This article is about Savings

There are 45 comments on this post.

Did you enjoy reading this article? You can receive free full-text articles from Get Rich Slowly in your email inbox daily by entering your email below. Along with this daily subscription, you’ll also receive personal finance advice selected by our MoneyRates.com Network financial experts. Also become a Facebook fan or follow us on Twitter.




Watching every penny is the starting point for getting rich slowly. But there are also big moves you can make that will earn or save you a lot of money. Big wins include refinancing your mortgage, negotiating your salary, improving your credit score or evaluating your car insurance. Your car insurance probably comes up for renewal every six months. When was the last time you compared insurance carriers or revised your policy to see if you could save a few hundred dollars? I thought so.

Des Toups, senior managing editor of Insurance.com (a QuinStreet site, like GetRichSlowly.org), has a lot of good information and statistics about car insurance that we wanted him to share with the GRS community. So, here’s Des!

Car insurance has only one real purpose: To stand between you and financial disaster.

Think about rear-ending a brand-new Jaguar, or your child causing an accident that puts other people in the hospital. Your car insurance only pays up to its limits. After that, you’re on your own.

Got a house? A savings account? A regular paycheck?

When there’s no more insurance, the other guy’s lawyers will turn to you.

Sure, there are generally accepted guidelines out there when you decide how much coverage to buy. Homeowners need at least $100,000 in bodily injury liability protection, because a large, valuable asset like a house is an easy lawsuit target if you don’t have enough to cover your victim’s hospital bills.

Or maybe you own nothing and have no savings – nothing you could lose. Then you might go for the legal minimum in your state.

The space between those extremes is huge, though, and needs vary from state to state, by age and by financial standing.

Seeing the choices other drivers in your situation make can be a good guideline when you shop for car insurance yourself. Insurance.com recently analyzed more than 550,000 insurance quotes delivered through its price-comparison tool to find the most common choices made by drivers of similar age, who live in the same state, who drive the same model year of car, or who own their homes.

You can find data for your state in the “What Drivers Like You Buy” tool.

Nationwide, there are clear patterns. Three out of four drivers choose a $500 deductible. A third of drivers under age 25 shop for the lowest legal amount of liability coverage, but only 19 percent of drivers over 55 do.

Nationwide, the most common coverage profile looks like this:

  • Most common bodily injury liability coverage: $50,000 ($100,000 per accident), selected by 46 percent of all drivers.
  • Most common property damage liability coverage: $50,000, selected by 59 percent of all drivers.
  • Collision coverage, selected by 60 percent of all drivers.
  • Comprehensive coverage, selected by 61 percent of all drivers.
  • $500 deductible, selected by 74 percent of drivers who buy comprehensive and collision.
  • Towing and emergency road service, selected by 16 percent of all drivers.
  • Rental reimbursement coverage, selected by 16 percent of all drivers.

As you decide on what coverage to buy, consider these tips:

  • Extra liability coverage beyond the required minimums is generally quite cheap – you’ll pay only a fraction as much for an additional $50,000 as you did for the first $25,000.
  • Raising your deductibles can save you money. Going from a $500 deductible to $1,000 on a 2012 Ford Explorer in Texas, for example, would cut the annual bill for comp and collision from $576 to $470. Saving $100 a year on your car insurance is nice, but only if you have $1,000 to get your car out of hock to the body shop.
  • Before you make big changes in coverage, shop around first. The more you pay for car insurance, the more you are likely to find savings by switching insurers.


This article is by staff writer Kristin Wong.

(This is part II in a series about challenging traditional measures of financial success. Part I was The “Ivory Tower”: Reconsidering the college investment.)

Last week, I was having dinner with my neighbor, a magnetic woman with a free spirit and a really youthful soul. She’s been renting the apartment above mine for something like 30 years.

“Do you ever think about buying a home?” I asked her.

She laughed. “You know how expensive home prices are here, don’t you?” she asked. Touche. In the Los Angeles metro area, the average home price is nearly half a million.

“Well, do you ever think about moving?” I asked. “Prices are a lot lower in other parts of the country.”

“No, I’m not going anywhere,” she said. “I think I’d rather be a renter here than a homeowner anywhere else. Plus, I love my apartment.”

From our conversation, I gathered that she’s perfectly happy living as a renter forever. Despite the discouraging prices in my area, it’s still a goal of mine to own a home someday. It’s always been a goal that I’ve had in the back of my head. I’ve always assumed homeownership is a smart financial move, something we should all strive for — become debt free, save money, buy a home, retire. That’s the traditional formula.

But lately, I’ve wondered: Why is homeownership such a measure of financial success?

The virtue of homeownership

Owning land has long been a sign of wealth. It’s almost a virtue. In an article for the Federalist, one writer stresses why buying a home is something to strive for:

“There is also a powerful social and political aspect to home ownership, one that transcends any particular culture or legal system. There is no more potent symbol of having made it, having achieved even the modest level of economic success and stability, than owning a home — there is a reason we immediately associate it with the phrase ‘the American Dream.’ The pride of a new immigrant family in being able to afford land in America is a staple of the immigrant experience.”

In theory, sure, it’s better to own something than to rent it. But in practice, it’s not always that simple. The pursuit of the “American Dream” led many people astray, as evidenced by the massive housing crisis. So is homeownership truly a symbol of economic success and stability? If you’ve done it responsibly, maybe it is.

The cost of renting

It’s long been put to me that renting a property is, simply, throwing your money away. I guess you can see it that way. When you rent as a retiree, your monthly payment is part of your retirement expenses; it’s not money you’re putting toward an investment. You also have less control over your living situation.

I’m certainly not going to argue that, in theory, owning something makes more sense than renting it. Renting comes at a cost, yes. But I’d argue you’re not exactly “throwing money away” by renting. You do get a place to live in exchange for your money, after all. My neighbor, for example, loves her apartment. For her monthly rent payment, she gets a great place to live in her favorite city.

The cost of homeownership

Beyond the down payment, there are a handful of other costs associated with buying a home. You have to consider:

  • Your monthly mortgage payment, which might be higher than your current rent

  • Home improvement costs

  • All kinds of insurance, including PMI, if you put down less than 20 percent

  • Property taxes

Those factors are easy enough to fit into an equation. But other factors aren’t. For example, what if I want to move in a couple of years? And what if the market is down during that time? What if there are other things I want to do that cost money? It will be tough to afford those options after putting 20 percent down.

Right now I’m lucky enough to afford a pretty enjoyable life with a lot of options, thanks to all the work I’ve put into getting my finances in order.

But if I bought a home right now, in my city, that would all change. I might have my dream home, but it might be at the cost of my dream life. If homeownership is a symbol of economic success and stability, where does that leave someone who has their finances in order, but continues to rent?

The American Dream, redesigned

Data from the U.S. Census Bureau has been consistently showing that homeownership in the States is gradually and steadily declining. Young people are simply putting it off. Of course, it’s less of a conscious decision and more of a necessity thing (those student loans are no joke) but I think this is sparking a change, either way.

NPR talked about this a while back. They reported:

“In a nation where homeownership is part of the American dream, a generation of renters could alter communities where they live and redefine the idea of middle-class success.”

Psychologist Katherine Newman told them:

“I’m hoping that the Millennial Generation doesn’t set its sights on homeownership as a benchmark of economic stability, because it’s going to be out of reach for so many of them that it will just be a recipe for frustration,” she says.”

In adapting to the aftermath of the Recession, I think we’ve had to rethink a lot of things, including owning a home vs. renting. Ownership is a sign of financial stability and freedom, but it seems like a lot of people are questioning the rush into that. Would I feel more financially stable if I bought a home right now? I don’t know. But I do wonder if homeownership is the measure of financial success it once was.

Homeownership and the third stage of finance

This is something I’ve been wondering lately. I recently talked about how I’m in the third stage of finance. At least, it feels like I’m in that stage. I ask myself: For what am I continuing to save? I’m not sure of the answer. It may or not be “… to buy a home.” But I’m comfortable with my lifestyle, my debts are paid, and I’m just saving to save.

But if I’m renting, am I really in the third stage?

I think if we’re talking about measures of financial success, we have to consider why we’re building wealth in the first place. I want to build wealth so I have options. I have the option, for example, to move somewhere else and buy a home. Or, I can stay in an expensive city that I love and be a renter. If I choose the latter, I’m happier. But if I choose the former, I no longer have as many options. But, according to tradition, I’d be an “economic success.”

“The face of getting rich slowly is changing”

It seems like we’re adjusting the way we think about the process of building wealth. William Cowie talked about this when he wrote about how employment is changing:

“The face of getting rich slowly is changing right before our eyes, even as the status quo is failing.”

In short, as a society, we’re adapting. People are changing how they think about not just homeownership but also employment, retirement, and higher education. I’ll continue to challenge these traditional measures of financial success in my next couple posts.

But I’d still like to know your thoughts, as I think I have more questions than answers. If you’re like my neighbor and homeownership is just not in the cards for you, does this mean you don’t have your finances in order? Is owning land the measure of financial success it once was?


This article is by staff writer William Cowie.

Retirement, that magic day you’ve had in your sights for decades, is finally coming into view. You may be in your 40s or 50s, and the big day may be next month or in a few years. Whatever your age and whenever the day, the time is coming for the big question:

What do you do now?

What to do in retirement?

I faced that question a few years ago, and I remember it well. My first reaction was terror. This is so final — you can’t turn back the clock and you don’t get any do-overs. (How many times I wished for just one!) All my bad decisions had grown up around me (or not grown, to be more accurate). Now, I was faced with two pretty large questions:

  • What income will I live from?
  • What will I do with my time?

What will you do in retirement?

You might think the first of those two questions would have been my main retirement focus; but in hindsight, the second is even bigger. It’s that age-old question: What are you going to do when you grow up?

Many people never give much thought to that question as they furiously run the rat race, focused on making payments, raising kids, keeping up with various Joneses, and generally “making it.”

Step back for a moment, though, and try to imagine what will happen. The first day is just like every Sunday. You wake up with no alarm, and do whatever you consider is fun to do. You don’t have to get dressed and rush off to work. After a week or two, though, it begins to sink is: This is different — it’s Sunday every day for you now.

How will you fill your retirement days when the novelty wears off?

It’s easy for many to dismiss what has become the Leisure World image: fuddy duddies in plaid pants and white belts riding their golf carts around the course, while the wives gossip and play bridge with the other members of the blue-rinse set.

But, what will you do that’s different? You can gallivant across the globe like J.D. Roth, but the reality is that most of us are probably not going to retire with that much money or that much of an adventurous spirit. I’ve asked many people in their 30s and 40s what they will do once they retire — and you’d be amazed how often I get a blank, deer-in-the-headlight look back in response. It’s a lot like Art Linkletter asking those little kids what they’d do if they were president. (One little girl famously said she’d order husbands to kiss their wives a hundred times a day.)

Most of us simply don’t know how we will pass the time in retirement. It took me a few years after I stopped commuting for a paycheck to figure out what I really want to do. What I looked forward to on weekends wasn’t enough to engage me for 16 hours a day. (Oh, that’s right, when you retire, you have 16 hours a day to fill, not just eight.) A couple we know from California simply stay at home and putter around. He recently confessed that they bought his wife a new car, but after three years it only has 3,000 miles on the odometer. (This is in Orange County, California, where public transportation is non-existent, so those are pure stay-at-home miles.)

There are many people who want to retire early, without defining what they want to do when they retire. They end up simply getting another job because it’s all they know.

So, the first thing you need to spend some brain time on is to figure out what you want to do when you no longer have to grind out a living. For me it was writing — something I had no clue I’d ever want to do until my mom idly remarked that my sister is so gifted with writing, what a pity nobody else in the family caught that gene. Ha! Sibling rivalry being what it is, I took up the challenge; now I’m the writer, and she’s still figuring out who she wants to be when she grows up.

But this is Get Rich Slowly, not Get Old Slowly, so let’s talk about the money for a second.

Structuring what you live from

No, this is not the standard lecture that you better start saving because old age creeps up on you faster than Speedy Gonzales; that’s a topic all to itself.

If you’ve been smart and availed yourself of 401(k) or similar retirement plans wherever you worked, and you changed jobs along the way, you may have accumulated a motley collection of retirement accounts: 401(k), Roth IRA and regular IRA.

Now the question is: What should you do with that assortment of nest eggs? Should you consolidate and simplify your budding financial empire in preparation for your freedom years?

Short answer: Yes.

Why?

The human mind has a hard time keeping up with complexity: Restaurants with complex menus lose customers. Are you on top of all your multiple accounts right now? Probably not. It’ll be much easier if you just had two or three.

How do you consolidate?

For starters, get out of all your 401(k) plans and roll over the money to an IRA account. You may not be able to do that with your current employer, but you’re allowed to do that with inactive 401(k) plans.

Why roll over to an IRA? Two reasons:

1. Returns: The standard most mutual funds aim for is the S&P 500 average (around 8 to 9 percent per year, depending on which dates you pick). Now, that being an average, you would expect half of all mutual funds to beat that, wouldn’t you?

You would be wrong. Fewer than 25 percent of all mutual funds beat the S&P 500… and it’s never the same bunch. Therefore, odds are your 401(k) funds underperform the S&P 500.

You can do better by rolling those over into a single IRA and investing it all into an S&P 500 index fund. Please note: I’m not saying an index fund is the best you can do, only that it’s one simple action likely to improve your returns.

2. Fees: Most 401(k) plans charge fees which eat away a significant portion of your earnings. Most plans are captive, meaning you, the employee, can’t choose just any mutual fund you want — you can only pick from the menu they offer you. And all of those mutual funds have a management fee.

Not only are you stuck with mutual funds which charge you a fee, but the 401(k) plan itself has plan administration fees. They may be hidden, but you’re always paying two layers of fees with 401(k) mutual funds. Both sets of fees eat away at your returns. The way they quote those fees makes it sound like they’re small, like 2 percent or something like that. Considering the return before fees (at best) will be something like 9 percent per year over the long haul, that 2 percent ends up being more than 20 percent of your earnings. To get a better idea of the magnitude of the fees, you need to divide the fee by the return. When you do that, they’re not so small anymore.

You can get a self-directed IRA account for free at most online brokerages, and you can pick any mutual fund you want. (You are not limited to your employer’s menu.)

But that’s not all. You can invest in any individual publicly traded stock you want, too. So, if you think Warren Buffett’s Berkshire can earn you more than that S&P 500 index fund (and it has for decades), you have the option to invest that way.

With your own self-directed IRA, then, you can significantly increase your earnings over those inactive 401(k) funds from previous jobs. Which brings up the next question:

Roth or regular IRA?

This decision is mostly driven by tax rates:

  • With a regular IRA you pay tax in retirement on what you draw.
  • With a Roth IRA you pay taxes now on what you put away.

(In both cases, the appreciation and income accumulate tax-free.)

As an example, if you’re really raking it in now and plan a fairly low-budget retirement, then a regular IRA makes more sense, because the deduction happens at a high tax rate, but the monthly draw will be taxed at a lower rate. On the other hand, if you’re scraping by now (and pay a low tax rate), you have nothing to lose by picking a Roth IRA. If you strike it rich, your income from that will be tax-free; and if it’s as middling as you make now, you haven’t lost much. (Editor’s note: Roth IRAs have income limits, so check with the IRS to be sure you’re eligible to contribute.)

Because the critical variable is your tax rate, now and in the unknowable future, it’s worth the money to pay an adviser to look at the variables of your personal situation and get some informed and professional advice.

General questions

What about diversification? Someone asked me if he should leave his multiple 401(k) plans in place to diversify away his risk.

In a word, no. There are many ways to diversify within a single IRA. What is more diversified than an S&P 500 index fund, for example? So you can have all your money in one place, easy to manage, while your investments are highly diversified.

What about real estate? Good question. Rental property doesn’t grow tax-free like an IRA or 401(k) fund, but it has the potential to be more lucrative. However, it’s not nearly as passive an investment. You have to get tenants, keep up with maintenance, and deal with late payers and those who destroy the property. It does have the advantage, though, of probably being much more inflation-proof than paper investments.

Retirement (however you view or define it) is as profound a life change as leaving home, marrying, or having kids. And it has as many opportunities to screw it up. Fortunately, though, you have more notice and more time to prepare.

The trick is to make use of that time. What are you doing?


Next Page »

See Archives