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It's always fun to get a little philosophical when you talk about budgeting because it is like at the heart of all money questions, I think.
I agree.
I feel we concentrate too much on the dollars and we forget there's a human being with feelings behind it.
You're listening to Life Kit.
I'm Mariel Segarra.
And that was certified financial planner Tanya P. Brown.
When Tanya gives financial advice, she often comes back to an acronym, SWAN.
S-W-A-N, meaning sleep well at night.
Because she says the best money choice isn't necessarily the one that optimizes your savings or your future earning potential.
It's the decision that makes you feel safe, and it's the one that's aligned with your values.
Keep that in mind as we have this conversation about savings buckets.
The idea with savings buckets is that you separate your savings into distinct categories, prioritize between them, and set up rules to decide when you tap into each one.
Doing this can help you stay motivated and stay on track with your money goals.
By the way, Tanya is also a job exit strategist.
I literally say my job is to help people quit theirs.
So helping people create a financial exit strategy to quit corporate and go solo.
And savings buckets are a big part of that.
Now, when I talk about savings, I don't just mean the money you put into a traditional bank account.
Investment accounts are a form of savings, too.
So are healthcare spending accounts.
And it can be hard to know how to prioritize between those.
A quick tip on that.
I would actually say prioritize the things that are likely to happen.
Those to me are the priority because those are what busts everybody's budgets and those are the things that are going to happen.
That bucket is what a lot of financial experts call a sinking fund.
It's meant for upcoming expenses that you're expecting.
And it's different from your emergency savings fund because an emergency you generally can't anticipate.
Those are you have to fly out because a family is ill. You have an over and above average budget.
Incident that happened.
And that's where the emergency comes in.
So I oftentimes say emergencies are for the things you pray never happen.
We'll have more on sinking funds, emergency funds, and other types of savings after the break.
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Tanya, I wonder why have a sinking fund at all, right?
Like, can't you just try to cover whatever short-term expenses come up with your paycheck?
With the short-term savings, let's just say you want to save for Christmas.
Yes, you can just wait to Christmas and spend the money, but then you always are finding yourself in a panic spending the whole thousand, whereas if you just set aside $100 every month...
It's smooth.
So think of short-term savings as smoothing what feels like an emergency or a panic moment.
So if you know this comes up regularly, you can simply have a line item in your budget.
A hundred of that thousand dollars may go towards a Christmas budget.
A hundred of that line item may go towards a future repair or future dental if you don't have that already covered inside of a flexible spending account or
Health care savings account.
So the goal of short term is to turn the panic into something that is automated and something smooth.
Do you recommend that people put their sinking fund and their emergency fund into separate bank accounts?
Some people like the separation because mentally they're like, okay, for a known future car repair, it's in short-term savings.
For if I lose my job, it's in emergencies.
And mentally they need the separation.
For others, for their sanity, they rather just drop everything in one bucket.
But now what they do, there are accounts where you can put money into one bucket and then you can assign, if you will, jobs.
So I don't know if you have $5,000 in the account, you know.
$3,000 is earmarked for your growing savings.
$1,000 is earmarked for home repairs.
$1,000 is earmarked for car repairs or whatever those short-term expenses that are likely to happen.
You just don't know when and not always know the exact amount.
And I guess there's something psychologically about if you have it earmarked for that thing, you're less likely to dip into it for something else.
Absolutely.
If you think in advance, what's the amount you want to have in there, you know, if you have any mini windfalls, like higher than expected tax return, you get a bonus, you save for something and you find out you got it for less than what's expected,
You know exactly where that excess money is going to go.
So it also trains you so you are doing it without thinking because if you give yourself a chance to think, you may talk yourself into not putting money anywhere.
And in both cases, this money should go in a traditional savings account, right, not into an investment account?
Yes.
And I tell people, think of savings as insurance, not as an investment.
This is money that you need now.
And if you put it into investments, either it's going to work or it's going to be less than what you need at the time you need it.
Not a chance you want to take if you need something, especially very short term.
Takeaway one.
When it comes to savings accounts, Tanya recommends that you prioritize your sinking fund.
That's the pool of money you can dip into for expenses you can anticipate.
For instance, if you know you need new tires this year, or you have an expensive medical procedure coming up, or you're planning a big anniversary celebration.
She suggests that you think of your sinking fund as separate from your emergency fund.
Your emergency fund is for the stuff you can't predict, but you know might happen in your lifetime.
Job loss, illness, a termite infestation, that kind of thing.
How much money do you recommend people keep in their sinking fund?
The short term is a lot more predictable because this is typically money you've spent every year.
So, for instance, if you own a vehicle, it doesn't take a lot to look at what's the life of the parts of your vehicles.
To get an estimate as to how much it would cost to repair.
So if you know you need a new radiator or a new transmission, you can check and know exactly how much you need to save.
Also in the short term as vacations,
If you look at what you spent last year on vacations nowadays between apps, between banks that have pretty sophisticated ways of tracking your spending, you can come up with a really good guesstimate and use that to factor into how much you want to save for vacations.
So with the short terms, you actually have numbers to work off of or to get estimates.
Because remember, these are expenses that are coming up throughout the year.
The typical things you spend money on outside of auto pay.
Okay.
And what about the emergency fund?
If you have a spouse that can take care of the expenses...
If you're living with your parents and you have someone that can cover your living expenses so you're not homeless.
We could be talking three months on that end.
If you are by yourself and your job is relatively steady, I would say three months may be on a light end.
Six months is more probable.
If you have a job where the market is very unsteady, we're talking six.
If you are the breadwinner of your family and you lose your job and there's no additional income, we're talking more six months to one year.
If you are self-employed, your income is going up and down like a roller coaster.
We're now in that six months to one year.
That gap is what I call SWAN.
And that is the number that helps you sleep well at night.
So the first part of the bucket's based on your situation.
The second part to me, that's when your personality comes in.
I will talk to some people and they tell me, I'm just not comfortable unless I have a year of savings.
I am not going to argue what someone needs to comfortably sleep well at night.
Takeaway two.
Figure out how much to put in your sinking fund by estimating your upcoming costs.
You can start with the next few months to get a quick snapshot.
For your emergency fund, consider your current living situation and whether you're supporting a family.
Also, what amount makes you feel secure?
You might end up with three months of expenses in the bank or a year.
Also, make sure to put your sinking fund savings and your emergency savings into an FDIC or NCUA-insured bank account.
Don't invest that money in the markets.
After the break, we'll talk about how to prioritize between these funds, your retirement savings and a brokerage account.
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Another savings bucket that you need to consider is your retirement fund.
At LifeKit, we often give the advice to prioritize this, especially if your company offers an employer match, otherwise you're leaving money on the table.
Tanya says if you can do it all, contribute to your sinking fund, put away money for emergencies, and contribute to the retirement fund, that's great.
But if you're absolutely down to the wire and you have to make a choice, she says prioritize your short-term savings.
Because this is money you're going to spend, would have to come as a priority.
Because this is not money that you are thinking of spending.
This is money you are going to spend.
If you don't plan for it, you are going to be in debt.
So I would say the things you know that are upcoming, that's got to be a priority.
Beyond that, I would say at least making sure you have the match as the bare minimum.
I find for most people, if you do it, you're surprised because it's typically for a lot of people pre-taxed.
So it doesn't come out as much as what people think and they probably have money left over.
Let's say you've met your...
Short-term needs and your emergency savings needs and you're getting your base level employer match from your retirement account.
Now you have some options and you could put more money into a retirement plan.
You could put money into a brokerage account.
Some people just put more money in a high-yield savings account.
How would you kind of order these?
The first way I would order it is personality.
I've actually been in this industry for well over 20 years.
And what I've found is...
If putting it in the retirement account creates the level of automation to make it consistent, I would rather go above the match because for some people that extra
Friction of having to also do a brokerage account may be enough for someone not to do it.
So I find one, what will be the most consistent, automated way for a person to save?
And that is the route we go.
I would prioritize it by what are you the most likely to use?
I would assess how much money did you spend last year on healthcare?
And if you've spent quite a bit of money, had quite a bit of visits, and even if someone is physically healthy, if you spend a lot of money on eye care or have eye problems or dental problems,
Then it would definitely be putting money in the FSA and HSA.
Because again, this is money you are going to use anyway.
So it's better that you just prioritize that.
Well, it's also tax advantaged.
That's the benefit like with HSAs and FSAs and retirement plans.
You are saving on taxes in one way or another through those, whereas you're not with a brokerage account.
Exactly.
Takeaway three, short-term savings is your top priority.
Otherwise, when an unexpected expense pops up, you'll go into debt, and that is very expensive.
But don't discount the long-term.
Beyond that, she says...
Do that.
Although I will note here there are ways to automate your brokerage account investments but it's often a little bit more complicated.
Also if you have a lot of medical expenses definitely take advantage of a flexible spending account or a health savings account if you can.
You'll never have to pay taxes on the money you put in there if you spend it on medical expenses.
Tanya and I also talked about what it means to save for a version of yourself that doesn't exist yet.
I always say you want to make sure you safeguard future you.
Yeah, this is a question that I think about a lot.
Like, how do you safeguard future you, but also save?
Understand that nothing is promised and we need to live today and enjoy our lives today.
And that comes into play when you're making decisions like how much of my...
Money am I going to put into a retirement plan that I can't access until I'm in my 50s without penalty versus how much would I put in a brokerage account versus a savings account?
It's sometimes a tough call because sometimes we can't really picture ourselves at 50-something, you know, when we're 20.
And it's like, well, I need this money now or I want this money now.
Also, if you've ever had a health scare or lost someone who's died quite young, it's like, I might not make it to 50.
You know, it gets very philosophical.
Here is what I find.
It becomes a balancing act.
I do not think you should sacrifice your present for your future.
I think it should be both.
And when I look at my peers, I can tell you I am so glad I started saving young.
Mm-hmm.
I think what helped me personally was when I took a look at a lot of people that were forced to work that didn't really have a choice in the matter.
I knew I wanted freedom and freedom met prioritizing choices, but I still went on vacations.
And it comes down to prioritizing what's important and ruthlessly eliminating everything else.
I love the idea of creating freedom for yourself, financial security, but also freedom and options.
It's like you don't have to retire.
You know, and stop working completely, but you also don't have to stay at a job that you hate.
And it is important, I think, for folks to remember that the earlier you start investing, the larger your gains are going to be.
Like, time is...
So when you start in your early 20s, you're going to have a lot more money than if you started at 30.
But even if you start at 30, you're going to have a lot more money than if you started at 40 because of the compounding gains.
Yes.
After a while, you start to see how it begins to compound, how it begins to grow.
So the earlier you start, 100% the better.
If I am investing for retirement, but I also have some medium-term goals, you know, I don't need the money immediately.
It's not for my emergency.
It's not for my short-term needs, but it's not for retirement.
Like I want to be able to access it before retirement.
It feels like that's
The good spot for a brokerage account.
Yes, it is great for a medium goal.
Back in the day when I first started, as my children say, in the late 1900s, which is so painful.
The rule of thumb back then used to be money that you needed in five years or more went to a brokerage account and money that you needed in five years or less was recommended for savings.
So historically, it used to be we hit a recession every five to 10 years.
So the thought process was, if you threw it into a brokerage account, you did not know which end of the economy you were going to land on by the time you needed the money.
So that was really conservative back then.
I will still say you are on a conservative side.
It's a decent rule of thumb to stick to.
Some people have lowered that to if you don't need the money for two to three years.
Yeah.
Sometimes you're saving money for the medium term, but you don't know exactly what it's for yet.
And I think that can be a little bit of a confusing place where like, well,
Where should I put this?
You know, I don't know.
Is this for a house?
Is this for like when I have a kid?
I just know I'm going to need money.
But before I'm in my 50s, you know, it still seems like if you don't know what it's for yet, that a brokerage is a good place to put it.
Absolutely.
I had account for I literally called it future me.
That was literally the name.
And I was putting money in there.
I had no idea what it was for.
And when this is quite a while ago, and because I just had that money.
I was able to support myself until I was able to make a decent living in financial services.
So I think it's totally okay not to know what it's to use for, but you want to give future you a future of options.
Takeaway four, brokerage accounts are a great place to park your medium and long-term savings above and beyond your sinking fund and your emergency fund.
Over time, you'll earn much higher returns in a brokerage account than you would in a federally insured bank account.
One rule of thumb, don't put money in there that you know you'll need in the next five years.
Because you want to be able to sell your investments strategically at a time when they'll earn you more of a return.
And you don't want to be forced to sell at an inopportune time just because you need the money.
Tanya says the five-year rule is a bit on the conservative side.
You could also say two or three years.
When you do have these different funds set up, how can you decide when you're okay with dipping into a particular one?
That is a great question and when I work with clients I would have them set up rules of thumb.
So for emergencies we would literally set up here are rules of thumb for instance an emergency is not to be used for an expense that's reoccurring every year.
Again, a car repair is reoccurring every year.
Travel is reoccurring every year.
Medical is reoccurring every year.
This is for over and beyond like a $4,000 repair, a major medical.
So that way you set the rules for the short term for travel.
This is meant for travel and nothing other than travel, right?
Or you decide that something else became more important.
You can include flexibility in there.
For car repairs, it could be this is strictly for the repair of a car up to a certain amount.
I don't know, a thousand, whatever you choose.
And beyond that, you can then include emergencies.
So giving yourself mental rules a thumb is important.
And also giving yourself rules of thumb as to how much, what's the limit in there?
Do you want to have $10,000 a year for vacation, $2,000 a year?
$500 for an emergency medical, again, if you don't have an FSA or HSA.
So I would say in addition to setting rules for spending, maybe set how much you want to have in there.
And then at what point do you stop and focus on replenishment?
Tanya, thank you so much for this.
Oh, sure.
This is my pleasure.
Oh, you were great to talk to.
All right, time for a recap.
Takeaway one, when it comes to savings accounts, Tanya recommends that you prioritize your sinking fund.
For instance, if you know you need new tires or you have an expensive medical procedure coming up or you're planning a vacation, this is separate from your emergency savings.
Takeaway two, figure out how much to put in your sinking fund by estimating your upcoming costs.
For your emergency fund, consider your current living situation and whether you're supporting a family.
Also, what amount makes you feel secure?
Put both funds into a federally insured bank.
Takeaway three, short-term savings is your top priority.
Otherwise, when an unexpected expense pops up, you'll go into debt, and that is very expensive.
But don't discount the long-term.
If you can do it, contribute to your retirement plan, especially when you're offered an employer match.
Remember, retirement plans are tax-advantaged.
Beyond that, if you have a lot of medical expenses, take advantage of a flexible spending account or a health savings account.
One rule of thumb, though, don't put money in there that you know you'll need in the next couple years.
Oh, and once you have all your different funds set up, make rules for when you're allowed to tap into each one.
Those will help you stay on track.
That's our show.
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Such an informative and interesting podcast.
Even my 12 year old is listening.
That's high praise, actually.
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Let us know what you appreciate about LifeKit with a review in your podcast app.
This episode of LifeKit was produced by Claire Marie Schneider.
Our digital editor is Malika Gharib, and our visuals editor is CJ Rikalan.
Megan Cain is our senior supervising editor, and Lauren Gonzalez is our executive producer.
Our production team also includes Andy Tegel, Margaret Serino, and Sylvie Douglas.
Engineering support comes from Sina Lefredo and Jimmy Keeley.
I'm Marielle Segarra.
Thanks for listening.
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