How To Approach Savings

Before discussing tactics, lets first take a moment to look at our financial situation from a thousand-foot view. We need to know where we are at, where we are currently headed, where we want to be, and come up with a plan of attack that best suits our needs. In this post, we discussed savings rates, but how do we determine what a reasonable savings rate for us personally?

Are we in a butt load of high interest debt? Might be wise to allocate more of our freedom $ towards extra debt payments. Are we maxing out retirement contributions, but eating rice & beans every night? Might make sense take your foot off the gas a little for now. Are we tearing it up, maxing out credit cards, living our best lives without a care in the world? Please stop, I’m worried about you.

Having emergency savings allows you to be more flexible, and more aggressive, in attaining more value in your life. The financial leeway to make tough decisions is what ultimately separates the wealthy from the less fortunate. Good financial health will lead to calm and rational decisions, which is why this area of your finances should not be taken lightly.

Stop living paycheck to paycheck and start living the life you deserve!

There are a number of different approaches to this one. First, and first mostly 🤪, your checking account should be totally FREE. In my opinion, a checking account is simply the vehicle used for money to come in, and money to dish out. You, the savvy solo, should have one checking account.

There’s something to be said for the crazy games people play with checking accounts and chasing bonuses. Opening up checking accounts all over the place can get confusing. Hats off to the people who can actually keep up with it and win. Generally, these offers are tied to a minimum dollar and time amount that the account needs to be kept open, or it incurs fees. If that money was invested, or even simply put into a high yield savings account, these offers usually don’t make it worth your while. If you want to play the game anyway, do the math, and make sure it’s worth your time.

Life, and finances in particular, can be complicated enough. I like to keep this part as simple as possible and play the rewards game with different credit cards. Here’s what I’m looking for in a free checking account:

• No minimum balance requirement
• Access to many free local ATMs
• Absolutely NO maintenance fees (within reason)
• FDIC Insurance (absolute must have)
• Phone app that allows for easy transfers

There might be other things, like top-of-the-line customer service and overdraft protection, that you value; make sure to read the fine print that your account is actually free though. A lot of accounts out there will offer overdraft protection without telling you the monthly fee of such a feature, avoid these accounts like the plague. The savvy solo isn’t going to need overdraft protection anyway.

You’ll hear a lot of advice out there to avoid the mega banks with certain things. As long as the checking account truly is free (again, read the fine print); feel free to open up a checking account with any bank or credit union that works for you.

Once you have the checking account opened up, set up direct deposit. It should be completely free and will save you the headache of another errand. Over time you can also set up automatic payments to certain fixed costs through this account; again, time is important, don’t let things like this slow you down.

Before you do ANYTHING else with your freedom $, make sure you save up one month of fixed costs (round up to the nearest $100) as a buffer in your checking account. For example, if your monthly fixed costs are $3219, you’ll keep saving freedom $ in your checking account till you hit $3300 after all expenses are paid and before your paycheck hits this account. Make sure your checking account never falls below $3300 moving forward.

There’s a pretty famous personal finance guy out there 👀 suggesting this number should be $1,000. What is this, 1993? 😂 This advice a bit outdated, and not going to get you very far should an emergency happen before you are ready to start an emergency savings account. This one-month buffer should be able to cover most true emergencies that might pop up at the worst time.

Speaking of emergencies…

Don’t lie to me, or more importantly yourself, you’ve heard of this before. Don’t be the guy who suddenly has an expensive mechanical issue on your car and make the rash decision to buy a new car on a loan because it’s not worth future headaches! Who would do that? Certainly not me! 👀 Actually… it was me, I did it 😂. If you did it too, you aren’t alone; let’s not make that mistake again!

Emergency savings allows for us to handle the unexpected when life strikes. Instead of being forced to take out a loan, borrow money from friends, or heaven forbid put something on a credit card that we can’t afford; we can just pay cash for it. Imagine that! No sense in having compound interest working against us when it doesn’t need to be there to begin with.

Don’t Do This

There is a very popular financial podcast I listen to (which shall remain nameless) where one of the hosts stated that her emergency fund was her credit cards. She went on to say that she has enough money invested in her brokerage accounts to account for any type of emergency. The plan was that she would be able to sell certain investments within 30 days to get enough cash to pay the credit card(s) off before accruing interest.

I nearly drove off the road! This is a horrific plan!!!!!!!

Luckily her wise co-host that day jumped right in and explained why this is a bad plan. What if all 4 tires on your car blow out at the same time, and the credit card you have on you is due tomorrow? What if your HVAC goes out, and in that 30-day period you have to pay the repair man you make a hasty decision to sell a promising fund? The “what if” scenarios go on forever, but you get the point. Credit cards are not an emergency fund.

It’s also a bad idea to prioritize filling an emergency fund when you have large expenses coming up. For example, if you are going to throw a big party for your friend in a couple months, keep this savings in a separate account or simply keep it in your checking account. No sense in contributing to an emergency fund with the plan to take it out for a non-emergency.

Also, don’t keep your emergency fund in a savings account with one of the mega banks that have a million brick & mortar locations. I used to do this; I believe the interest rate I was accruing on that was at .01% 😂. Not the optimal path to financial freedom.

Do This

Open a high yield savings account.

This is going to be a separate account from all of your other accounts. I personally keep mine in a separate bank so that I don’t look at it when I look at my checking account. Wherever you want yours, make sure it’s separated in a way that it will not get mixed in with other money. It needs to be in a place where you have access to it within a week or so, without creating some kind of taxable event.

Most of high yield savings accounts are online banks, make sure it’s FDIC insured. There are several to choose from, and the rates fluctuate relatively often. As of right now, October 2024, a high yield savings account should be at around or north of 4%. I’ll create a post with my favorites in the future, but the idea is to have this money accruing more money without you doing anything.

Many high yield savings accounts take 2-3 days to transfer money out to checking. I actually love this. Most emergency situations will allow a couple days for you to pay anyway. It also forces you to really think before pulling money out of it. If there is a way for you to make a change to next months designated savings $ in order to pay for this emergency, it would most likely be optimal.

Save 6-9 months worth of fixed costs.

This will not happen overnight. Take a deep breath and relax, there is absolutely no need to hit this milestone right away. Depending on your personal financial situation, it might take years to get there. That’s totally fine, everyone’s on a different path towards financial freedom.

Most of the advice out there will say to save 3-6 months’ worth of expenses; this is generally geared towards families with more than one income per household. You, the savvy solo, should up that number to 6-9 months for additional security.

If you have one source of income and people relying on your income (kids, elderly relatives, etc.); that number should be closer to 9 months. If you have more than one source of income, and you only have to worry about you; that number should be closer to 6 months. Try not to go too far beyond this number, I’ll get into why in a bit. For now, find the number that you are comfortable with and don’t move the goal posts unless there’s a life change.

Break glass in case of emergency.

An emergency fund is for emergencies… that’s it! It’s not for that plane ticket to Spain, it’s not for a new car, and it’s certainly not for that new fedora that makes you look quite dashing. Stop smoking that corn cob pipe for a second, and really ask yourself if what you are experiencing is an emergency.

An emergency is an unexpected expense that has to be paid sooner than your incoming cash flow allows. These might include:

• Sudden vehicle mechanical issues
• Medical emergencies
• Monthly expenses after unexpected job loss
• House repair that needs immediate attention (HVAC goes out, leaky roof, etc.)

Before we go further, let’s go over a few things that aren’t an emergency:

• Bathroom remodel
• Brand new car
• Optional medical procedures that can be planned for
• Clothing
• Wedding gifts

Now, if you have to dip into your emergency fund because you didn’t plan well enough in advance, it happens. Try not to let it happen over and over. Remember to ask yourself if this thing you are paying for is worth the value of robbing your future self.

If all goes right, you’ll die with this fund in place. That said, when emergencies actually do happen, that’s why this fund is here! Don’t go crazy trying to work around it at the detriment of your current financial situation (i.e. taking out a loan). Think of this as a loan to yourself and pay yourself back over time.

Alright alright, no need to curse, but the next topic actually rhymes…

I came up with this idea for myself, and I’m very excited to share it. I’m probably not the first to come up with it, but it works for me and I’m hoping it takes off and becomes the norm for the savvy solo to initiate.

Separate from your emergency fund, open a different high yield savings account called “the bucket fund.” It could be called the vacation fund, the oops fund, the car fund, or whatever you want to call it. I like to call it the bucket fund because it should involve all of your upcoming (near and far) expected expenses separated into buckets. This account should total more than the cost of the next car you want to purchase, with a minimum total of about $15k.

In the process of putting money into this account, feel free to use it for non-emergencies along the way. Whether it’s a vacation, a series of Christmas gifts, or a brand-new car completely guilt free! Most high yield savings accounts will allow you to separate money into different buckets within the same account. So, while filling this fund, you can label different buckets with different names and $ goals. If your chosen high yield savings account doesn’t offer this feature, no problem! Break out the ol’ pen and paper, and list these buckets out by hand.

For example, your bucket fund might have a $10,000 car bucket (planning to replace your current car with a newer used one), $3,000 vacation bucket, and $2,000 wardrobe bucket. Maybe you are eyeing that new Toyota Tacoma, and the MSRP on that bad boy is $45k. Awesome! Put that down as one of your buckets inside that account and start allocating part of your freedom $ towards it! Feel free to change plans with where that money goes in the future, the important part is that you have a fund dedicated towards guilt free spending!

There is no one plan for everyone when it comes to allocating freedom $. As discussed, the savvy solo is going to determine the best path for themselves. It’s totally natural to be overwhelmed at first; in fact, a financial coach can really help a lot in this area. Coming up with the right financial plan is a great feeling, the best ones are adjustable enough for life changes as time goes on.

The 2024 savings allocation plan for me was very sporadic and had a lot of changes as this wild year went on! I’ll cover my personal money story in a future post, but for now just know that the mistakes I made were not overly detrimental because I always had a full month of breathing room.

If I was forced to suggest a savings plan for the standard solo, without seeing their financial situation (or knowing their core values), it might look something like this:

1. Put in enough $ for the company match in retirement savings
2. Save one months’ fixed costs in your checking account
3. Attack that high interest debt without mercy
4. Allocate monthly freedom $ between remaining debts, bucket fund, additional retirement contributions, emergency fund, and a little fun

The allocation of what goes where simultaneously would have to be determined by looking at a combination of the savvy solo’s upcoming 12-month schedule, and their core values. Don’t forget, the bucket fund can be used on anything from a can’t miss out of state wedding, to a new AC unit, to a hot date you have coming up. Hey, I’m human too, I’m not going to let something like student loans take me away from everything that I value! 🤪

With the one-month buffer in checking, the emergency fund, and the bucket fund in place; your immediate cash savings should be roughly one years’ worth of expenses. Not to mention, most of this is earning interest! Imagine your swagger if you had one full year of your future covered! That person is walking around with some serious confidence! Maybe enough confidence to get that raise next quarter 👀, or enough confidence to talk to that hot thing at the bar 😂. More importantly it could give you the confidence to make serious changes in your life that allows for more time spent on core values.

There will probably be some push back on holding so much $ in cash. To that I say, cash is not trash!

We are in a glorious age where cash is earning about as much appreciation as a single-family house, take advantage while it lasts! Inevitably the Fed will cut interest rates, and we’ll see these numbers fall (it’s already happening). Even if these funds are earning 2%, it’s keeping up with inflation, so stick with it! We can adjust the savvy solo plan as times change, but having some level of cash for unexpected emergencies and planning ahead for the expected expenses is essential.

Did you recently hit a savings goal! Message me, or post in the comments below! I always love hearing about money wins!

Stay classy Solos! ✌️