Divide Your Savings Into Three Categories – Financial Literacy Saving Series

If you haven’t already, read our previous post Paying Yourself First

So now that we are all saving 10% of our income each month we need to break it down into three categories. You should put aside 20% of your savings each month into an emergency savings fund. An additional 20% should be put into an account for emotional spending and 60% should go toward your long-term savings goals.

So lets say that Mary’s gross income each month is $2000. She would set aside $200 a month for her savings. Now we will want to break that down as follows; $40 would go into her emergency savings fund and $40 would be put into her emotional spending fund. This would leave $120 to go into her long-term fund.

Emergency Savings

It is a good idea to have a fund built up of 3-6 months of income in case of an emergency. If you were to lose your job would you have enough money set aside to survive while you searched for a new job? this money should be put aside in something like a money market account that is low risk and fully accessible.

Emotional Savings

Another area that is smart to save for is emotional savings. Remember, “You can have anything you want, just not everything you want.” Set money aside for emotional expenses that might arise like  a family vacation, clothing for a special event, or a recreational vehicle. You can put this money in any savings account that is easily accessible.

Long-term Savings

This is the money that you will want to set aside in order to accomplish your long-term goals, like retirement. This also represents the largest percentage of savings and for good reason, there are 10 million Americans over the age of 60 that live in poverty and there are 16.4 million in this age group that are “near poor”. Put this money in a long-term retirement account like a 401(k) or a Roth IRA.

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