When I was much, much younger, we would gather around in a circle and play a game that went like this:
Player 1: Who stole the cookie from the cookie jar? I think number 2 stole the cookie from the cookie jar.
Player 2: Who me?
Player 1: Yes you.
Player 2: Not me.
Player 1: Then who?
Player 2: I think number 3 stole the cookie from the cookie jar.
Player 3: Who me?
Player 2: Yes you.
Player 3: Not me.
Player 2: Then who?
Then the cycle would repeat until we all got tired and bored of playing it.
In real life, we all have financial cookie jars or places we put our cash, whether they be our wallets or purses, piggy banks, savings deposit accounts or even investment accounts. And just like with cookie jars, we tend to dip into our private stash.
Personal finance teaches that if we truly want to save and build our wealth, we must save in different accounts, at least for the major purposes. Samples of these major purposes would be getting a post graduate degree, getting married, sending children to school, buying a car,buying a house, enjoying a grand family vacation abroad, and funding retirement. There are several reasons why having separate savings and investments accounts is ideal.
One is that having an account for a particular purpose serves as a deterrent to our propensity to dip into our financial cookie jars. If we knew what the savings or investment account was for, we would think twice about putting a dent on a child’s college education funding, delaying the purchase of our dream car or home, or even reducing the quality of our retirement lifestyle. Having just one account makes it difficult to see which goal is being compromised. And as a result, we are likely to end up fooling ourselves into believing that none of our financial goals is being shortchanged. As an added protection, we could even set up “and” accounts where two or more signatures are always needed for withdrawals. This feature would serve as a check and balance.
Another reason for having different financial cookie jars is that goals will differ in terms of the time we have to achieve them. The more time we have, the lower and more affordable would be the required level of our periodic additions to our savings and investment account, all other things being equal. By knowing our savings and investment horizon as well as what we can afford to add, we could determine what we need to earn for a particular goal.
On a rough rule of thumb, the farther the goal, the more we could invest our savings in higher risk, long-term outlets like bonds, stocks and pooled funds, tempered only by our risk preference. The closer our goal, the more we should invest in short-term instruments like time deposits, special deposit accounts (SDAs), Treasury bills, and short-term commercial papers.
So saving in different accounts will avoid having to ask who dipped his fingers in our private stash and pointing an accusing finger. And as they say, whenever we point, three of our five fingers point back at us.
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