First Person: Why I Divide My Savings Into 4 Financial Baskets

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In the past 10 years, I've dipped into my retirement savings more than I'd like to admit. I've taken out 401(k) loans to pay for a new car and used my Roth IRA savings to pay for my sons' college tuition. I recently read an article on Finance News Today about dividing my savings into four financial baskets. It dawned on me that I'd be better prepared for the different short, midterm and long-term goals if I divided up my savings. Although I could use one savings account for my different goals, I decided to set up different accounts.

Short-term savings

My short-term savings fund is a simple savings account. I use my short-term savings fund as an emergency fund in case I have unexpected medical expenses, a flat tire or broken washer. I have a goal of saving $15,000 in my emergency fund but still have a long way to go.

Midterm savings

My midterm saving is going to be used on purchases I want to make in the next one to five years. I don't look at my midterm savings account as urgent things I need as much as things I want. Instead of using a savings account, I use a money market account as well as CD's to save for my midterm goals. My main midterm goal is to buy a car in another two years. I'm hoping to have $20,000 saved for a car.

Long-term savings

My long term "basket" is going to hold the savings that I will need 10 years down the road. I don't plan to retire in another 10 years, but I could be laid off or become too ill to work. I know a lot of friends who lose their jobs in their 50s complain that it's challenging to find employment again. In 10 years, I'll be too young to take out any of my retirement money. In other 10 years, I might also want money to purchase a step-up home. I don't have any money saved yet for this basket, but I set a goal of $50,000. I invest in exchange-traded funds that include stocks. I use a regular discount brokerage account instead of a retirement account for the long-term savings.

Retirement savings

My final financial basket is my retirement savings. I divide my retirement savings between a Roth IRA, Rollover IRA and a 401(k) plan through my company. According to the Finance News Today article, people shouldn't be fooled into thinking the can depend on Social Security. Most experts ay Social Security and 401(k) plans only cover half of what retirees need.

I made the mistake in the past of using my retirement savings years before I retired because I figured I had plenty of time. By writing down what I want to purchase in the next one to 10 years as well as writing down different ways I need to spend money from my emergency fund, I have more clarity. I'm no longer stealing from my retirement account in order to pay for my needs in the moment.

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More from this contributor:

Replenishing our Emergency Account

I'd Only Buy a New Home

I'm Not Letting the Recession Haunt my Retirement

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