It is better to invest more of your money than to build savings beyond what you would ever need in the short-term. Savings is a way to horde money, not to grow your wealth, not to horde money. That being said, you should have multiple savings accounts with enough money for different purposes.
What’s The Right Number?
There is no magic number for savings accounts you should have. To be honest, it depends entirely on your needs. However, I never recommend having just one savings account. I recommend using a categorizing or labeling method to set up your savings accounts. I have three savings accounts.
1) Short-Term Savings
The first savings account you should develop is for short-term savings. This is for purchases in which will happen in the near future from car and home repairs to health care, or other sudden unexpected expenses.
Your short-term savings is your most liquid account. When you have this account set up, you should feel little, if any hesitation for withdrawing from it. I set up a my short-term savings to be directly linked to my checking account. Money can move between them with no issues.
However, you should treat this account like survival storage. Whatever you pull out, you replenish as soon as possible.
2) Long-Term Emergency Savings
As previously mentioned, you should have three to six months of salaries in savings set aside for emergencies you cannot control. This includes lay-offs. Your long-term emergency savings should not be directly linked to your checking account. There should still be no problems in transferring money, but transferring money should not be instant.
3) Large Purchase Savings
I am planning on buying a newer car in the near future. Having my money in investments alone would be unwise as the amount of time required to save up for a car will not be several years.
When you have plans to make a large purchase well above a few thousand within less than two years, you should forget about adding more into you investment portfolio strictly for the purchase. Instead, just start saving. The rate of return will not add much to your purchasing power and the risks of sudden loss outweigh the benefits. Remember, investing works, but you are only likely to have great results if you invest for the long-term. You loose the benefits of investing when your financial goal is more short-term.
While I recommend three savings accounts there are multiple reasons to have more savings accounts. Note, these savings accounts are meant for future expenses, both expected and unexpected, not investments. Setting up savings for all your needs will help you be better prepared for your future and help you forge your wealth.