Early this year, I recorded a simple financial goal: by December 31st, I wanted to have $1,000 in my ING emergency fund. At the time, I had about $500 and change in the account. Now, with a little over two months left in the year (and, if you can believe it, the decade), I’m less than $75 away from my goal.

Some things I’ve learned along the way:

1.) Having an emergency fund (even a small one), really does give you some peace of mind. We all worry about our transmission conking out, a huge medical bill, or losing our income,  but we need not worry as much if we have money set aside specifically for these possibilities. Unless you are an exceptionally lucky person, these sorts of things will happen at some point in your life. We won’t know when, but we can be ready.

Many people have enough assets to cover a minor crisis or two, but for many this entails raiding a retirement account. Since this is essentially stealing from your future, and you get slammed with taxes and penalties to boot, this only adds insult to injury in an emergency-type situation.

2.) It’s also a good idea to have a miscellaneous savings account for unexpected expenses. This account can cover untimely cash outflows that aren’t exactly a full-blown disaster; speeding tickets, broken windows, or a towing bill after leaving your car in the street during a snow ordinance (guilty here). These things all suck, but they aren’t emergencies in the way that being laid off is. If a legitimate crisis is present, you will know it. Otherwise, don’t even think about touching that emergency fund.

3.) A 1.3% interest rate blows. It’s disheartening. It makes me disgusted with our drunken-sailor monetary and fiscal policies that are killing the dollar. Not too much we can do about this though; an EF needs to be extremely low-risk and liquid.

After I reach my goal, I’ll likely cut back on EF contributions, maybe putting in 1-3% of my income (vs. 5%+ now). This will allow me to focus a bit more on scaling the mountain of student-loan debt that looms before me.

Saving for retirement is pretty straightforward. We try to max out 401k’s and IRA’s, hope the markets do their thing over the long haul, and then retire a millionaire. Simple enough.

Hopefully that’s not the full extent of ours savings though. We also need to consider things like…

-Vehicles
-A house down-payment
-Education (self or child)
-Wedding (again, self or child)
-Vacations
-Emergency expenses

I can think of three ways to pay for such big-ticket expenses:
1.) Rake in a monstrous income and pay for them as they come.
2.) Charge them to a credit card or dash to the bank for a loan.
3.) Steal from your future by raiding your retirement funds (and paying enormous amounts in taxes and fees to boot).
4.) Plan well in advance and save.

Unfortunately, option 1 isn’t realistic for most of us, and numbers 2 and 3 are definitely undesirable. It’s clear that we need to become proactive with our savings.

Now the issue at hand is how to save. For the most part, there is no right or wrong way to save. The only blatantly wrong decision is simply not saving at all. However, I’d like to make a case for having multiple savings accounts, each with a specifically designed purpose.

Even though you may not know exactly how much you’ll need (or when), there are still advantages to saving this way. I’ll use an example:

Let’s say that, outside of retirement savings, you have $17,000 in a single money market account. In addition, your old rust-bucket of a vehicle is on its last legs and will need replaced soon. How much of the $17k should you spend on a new ride? How much (if any) should you finance? It’s a tough call when your other big objectives of your savings are considered- a proposed trip to New Zealand, a MacBook, and a healthy cushion for emergencies.

Now with the same $17,000 split up among different accounts- one each for a car, a MacBook, New Zealand, and an emergency fund, the decision is easier. If the vehicle account balance is $9,267.45, you know exactly what you have to work with.

Even though the total sum of your savings is the same, it’s easier to prioritize as you go when you save this way. You can contribute more to accounts of higher importance while depositing smaller amounts to other goals.

A criticism I’ve heard of this method is that, if unavoidable expenses are bigger than the amount you’ve allocated to it, you’re going to have to pull money out of other areas anyway, so why bother to keep funds separate? This is true, but this system ensures that only on genuine emergencies would this be the case. In instances such as the car example, you can raid other accounts only by clearly acknowledging that you’re stealing from one of your other goals. As a result you’ll be much less likely to do so. Besides, by being more proactive, you reduce the likelihood that these situations will create such a dilemma.

To account for some of the uncertainties of life, I’ve opened a miscellaneous savings account in addition my defined ones. It will take some discipline not to tap into it for certain whims, but I think the added flexibility will be beneficial.

With their great subaccount feature, ING* is the perfect banking institution for this setup. I don’t know of any other bank that allows depositors to open and maintain multiple accounts so easily. It literally takes less than 30 seconds to open a new account when you’re an Orange Saver, and the ability to name them is beyond awesome.

Once again, there is no necessarily right or wrong way to save. I just wanted to share this method because it seems to work fairly well. As always, I’d love to hear your opinion on this.

*Note: If you’re interested in ING and decide to open an account(s) with them, let me know. New customers that deposit at least $250 and use a referral code get a free $25 and I get $10, so it’s a win-win for all.