Savings strategies that actually work

0:00This message comes from Integrative Therapeutics, makers of Cortisol Manager, named Best Overall Ashwagandha Supplement by Vogue. Use code STRESS2026 for 20 % off of Cortisol Manager on Amazon.com. 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.

0:41SWAN. 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.

1:21I 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 health care 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.

2:00That 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 the family is ill. You have an over and above average incident that happens, 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.

2:42Tania P. Brown:This message comes from American Home Shield. An AHS home warranty helps protect your major systems and appliances, no matter how old. Do you have an unreliable AC or a leaky water heater? AHS understands the headache and financial burden of surprise breakdowns. With an AHS home warranty, they'll fix a covered item when it breaks, and if they can't repair it, they'll replace it. Plus, as a benefit to select plans, you can even video chat with a repair expert to help troubleshoot home hassles over the phone. American Home Shield. Don't worry, be warranty. Get 20 % off all plans at ahs.com slash NPR and see promo details.

3:22Tania P. Brown:See ahs.com slash contracts for coverage details, including service fees, limitations, and exclusions. This message comes from Jerry. Many people are overpaying on car insurance. Why? Switching providers can be a pain. Jerry helps make the process painless. Jerry is the only app that compares rates from over 50 insurers in minutes and helps you switch fast, with no spam calls or hidden fees. Drivers who save with Jerry could save over$1 ,300 a year. Before you renew your car insurance policy, download the Jerry app or head to jerry.ai.npr. On All of It with me, Alison Stewart, We'll talk about art, music, theater, literature, history, food.

4:08Well, all of it. Hear in-depth, insightful interviews with authors like Zadie Smith, musicians like Steve Earle, actors like Kate Winslet and beyond. That's all of it. Available wherever you get your podcasts. The NPR Network has always been powered by the people it serves, not by shareholders or special interests, but by people like you and me who believe in a free and independent press. We've just passed the one-year mark since Congress eliminated federal funding for public media. Please show your support before the end of the month. Visit plus.npr.org. Tanya, I wonder why have a sinking fund at all, right?

4:49Like, 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 till Christmas and spend the money, but then you're 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.

5:25A 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 a 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.

6:10For others, for their sanity, they'd rather just drop everything in one bucket. But now 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 count, 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.

6:50Absolutely. If you think in advance, what's the amount you want to have in there? You know, if you have any mini windfalls, like a 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.

7:26And 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.

8:14Job 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 is 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.

9:08So 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.

9:50If 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.

10:28I'm like, then 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.

11:04Don'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.

11:16This message comes from Jerry. Many people are overpaying on car insurance. Why? Switching providers can be a pain. Jerry helps make the process painless. Jerry is the only app that compares rates from over 50 insurers in minutes and helps you switch fast with no spam calls or hidden fees. Drivers who save with Jerry could save over$1 ,300 a year. Before you renew your car insurance policy, download the Jerry app or head to jerry.ai.npr. 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.

11:58Otherwise, 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're going to be in debt. So I would say the things you know that are upcoming, that's got to be a priority.

12:33Beyond 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.

13:10How 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.

13:56And 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 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.

14:39Otherwise, 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 enough to your retirement plan to collect any employer match you're offered. Beyond that, she says where you put your savings comes down partly to personality and values. If you're more likely to invest money through a retirement plan because it comes out of your paycheck and it's automated, 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.

15:18You'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 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.

16:07It'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, you know, 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. Because I have choices and options that a lot of my peers do not.

16:53So the first thing I think is I want to safeguard future me. And 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 meant 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.

17:35And 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 the biggest factor here. 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.

18:24It'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.

19:04So the thought process was, if you threw it into a brokerage account, you did not know which end of the economy you were

19:17That 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. You're 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.

19:55Absolutely. I had an 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.

20:45One 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.

21:22So 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. 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.

22:09And beyond that, you can then include emergencies. So giving yourself mental rules a thumb is important. And also giving yourself rules a thumb as to how much, what's the limit in there? Like, 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.

22:49Time 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.

23:24Otherwise, 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. Takeaway four, brokerage accounts are a great place to put your medium and long term savings. One rule of thumb, though, don't put money in there that you know you'll need in the next couple of years.

23:57Oh, 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. Before we go, what do you think? Would you rate and review LifeKit in your podcast app? Here's one review from user OBPW123. Such an informative and interesting podcast. Even my 12-year-old is listening. That's high praise, actually. And also, yeah, I wish I had access to all the things I've learned on LifeKit. When I was 12. Go ahead. 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.

24:35Our digital editor is Malika Garib, and our visuals editor is CJ Ricalon. 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 Lafredo and Jimmy Keeley. I'm Mariel Segarra. Thanks for listening.

24:56Tania P. Brown:This message comes from American Home Shield. An AHS home warranty helps protect your major home systems and appliances, whether they're brand new or part of your home's history. A home warranty is different than homeowners insurance, which covers things that might happen, like fire, theft, or storm damage. A home warranty covers what will happen, like normal wear and tear on the items you use every day, like your oven, fridge, AC, and plumbing. American Home Shield will fix a covered item when it breaks down, and if they can't repair it, they'll replace it. American Home Shield. Don't worry, be warranty.

25:32Tania P. Brown:Get 20 % off all plans at ahs.com slash NPR and see promo details. See ahs.com slash contracts for coverage details, including service fees, limitations, and exclusions. This message comes from Mint Mobile. If you're tired of spending hundreds on big wireless bills, bogus fees, and free perks, Mint Mobile is for you. Shop plans at mintmobile.com slash switch. Taxes and fees extra. See Mint Mobile for details.