It’s times like these you learn to save again. That’s certainly what pros are telling Americans: Suze Orman, for example, recently upped her guidance for how much to have in your emergency fund from 8 months of essential expenses to 12 months, and other pros say with a recession looming, your emergency fund is even more important. (The good news? High-yield savings accounts are now paying more than they have in years — you can see the best rates on savings accounts you may get now here).
But saving money is one thing Foo Fighters frontman and 18-time Grammy winner Dave Grohl doesn’t have to be reminded about. Sure, you might say, it’s easy for him to save: He’s worth an estimated $320 million dollars, according to Celebrity Net Worth, but he goes above and beyond. He’s known to “drive a family car” and live in “a house that is just big enough” (though he does have some splurges, like his music studio designed to look like ABBA’s legendary Atlantis studio). But one simple habit of Grohl’s is something (if tweaked a bit) that we can all learn from: In 2017, when asked about his paychecks on The Red Bulletin, Grohl said, “It goes straight into my bank account where it turns all moldy and smelly.”
What Grohl is practicing, in some ways, is something pros have long recommended: paying yourself first. He makes sure that money goes right into an account before he even touches it. Assuming this doesn’t lead to a cash flow deficit, Daniel Forbes, certified financial planner at Forbes Financial Planning, says many clients have benefitted from a ‘set it and forget it’ approach to putting money away.
Here’s what many pros recommend for the paying-yourself-first approach: Have some of your money go into checking so you can pay bills and other things you need, some go into savings so you can build an emergency fund and save for other short-term goals, and much into investments.
“Setting up an automatic savings to an account before your check hits your checking account is a great way to build discipline with your savings habits,” says certified financial planner Cameron Brady of Michael Brady & Co. Adds Alison James of WorthWise Financial Partners: This is a great habit even if you can only afford to direct a small amount into savings; similar to a 401(k) contribution, you probably won’t miss the money if you don’t see it.
That said, make sure at least some of those automatic payments go into a high-yield savings account (you can see the best rates on savings accounts you may get now here) so you can build an emergency fund of at least 3 months of essential expenses. Indeed, keeping your savings in a traditional savings account at the current average interest rate isn’t much better than keeping it under a mattress. “At a minimum, you should consider establishing a high yield savings account or purchasing Series I Bonds,” says James.
“Just because you route the money into an account doesn’t mean the work is done. If it just piles up in the bank, you’re not necessarily making a return. Saving is great, but it’s only part of the equation,” says Jarrod Sandra of Chisholm Wealth Management. You want both a solid emergency fund, and you want to invest for retirement. “Select a diversified portfolio of investments that reflect your comfort level with volatility and the time horizon for eventually using the funds,” says James.
Whether or not you need a separate account for other savings goals, in addition to an already established emergency savings account is up for debate. “If you can’t trust yourself to leave the money alone, a separate account may provide the psychological distance you need to keep that money socked away and avoid the temptation of spending it down,” says James. Meanwhile, Sandra thinks of accounts like these as goal-based accounts . “Some people have experience with Christmas club savings accounts, saving throughout the year into one account for Christmas gift purchases. Similarly, accounts can be set up for annual vacations, saving for a down payment on a house, or paying for a new car,” says Sandra.
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