Over the last couple of years I’ve become a big fan of setting up separate savings accounts, or sub-accounts, for saving towards a specific goal. As a visual person, it helps me to see a goal description and a balance next to it to show how close (or how far) I am to reaching that particular savings goal.

We currently have a number of sinking funds established in an online savings account for things like Christmas shopping, vacations and insurance premiums. We also continue to save towards a fully-funded emergency fund of six months of expenses. However, I feel compelled to save towards a new goal.

Opportunity Fund

Ever had the chance to take a last-minute trip you wanted to take, but didn’t have the money for it? Maybe it was to attend a conference on a subject you are interested in, or to visit a place you have wanted to visit since childhood. With an opportunity fund you would be able to answer when opportunity knocks.

I am reluctant to use our savings for any reason other than what the money is intended to cover. For instance, I don’t dip into our emergency fund if I find a great deal on a new laptop, and I don’t pull money out of the Christmas Savings account to buy the kids a bike in June. For the same reason, I personally find it hard to take advantage of opportunities outside of the monthly budget, and outside of our targeted savings goals. Here are a few examples of occasions to use an opportunity fund:

• Last-minute travel deals
• Clearance prices on household supplies to stockpile
• Pay cash for real estate (this is more of a “someday” goal)
• Giving. How many times have you wanted to give money to a neighbor or loved one, but didn’t have any to spare?

Why Not Use a Credit Card?

Many people simply carry a credit card for covering life’s opportunities, which borders on impulsive spending, and we all know impulsive and credit cards don’t mix. Until I’ve reached debt freedom, I’ve sworn off credit card use. For now, I find it too tempting to swipe a credit card and pay it off. I still need the transactional pain of paying cash or watching it immediately leave my checking account through a debit card.

So, I think of an opportunity fund as sort of my own personal line of credit, except I don’t have to adhere to credit card issuers’ ridiculous rules and be subjected to their frequent rule changes. It is empowering to seize the moment, pay cash, and not have a debt following me around long after.

Where to Save For Opportunities

My wife and I have decided to park our Opportunity Fund in one of the top online banks at ING Direct. The money accumulates at a slightly higher rate of interest than at a traditional savings account, and I’m a big fan of their online interface and transfer options. If something comes up, we can transfer money to our checking account in only a couple days, or simply write a check from our local emergency fund and replenish it from the Opportunity Fund. Either way, it’s nice to have some cash on hand specifically for an opportunity- most of the time it doesn’t knock twice!

When it comes to emergency funds savings, I subscribe to the theory “out of sight, out of mind.” Saving money at online banks helps to protect me from myself, as a recovering spendthrift. Our emergency funds are safely stashed at online banks if I need them, but not too accessible in the event I declare not having a plasma screen the week before college football season kicks off an emergency.

Online savings banks were all the rage just a couple years ago. It wasn’t unusual to score a 4 or 5 percent interest rate on online savings accounts. Today, the “high-yield” from high-yield savings accounts has all but been obliterated. Still, there are a few good deals at the best online banks, if you no where to look.

If you are like me, and have only a modest amount to save, one of the following online banks might be your best bet. I’ve listed them in no particular order after the first one (ING DIRECT is still my personal favorite, despite their relatively low interest rate).

ING DIRECT (1.40% APY).I’ve had an ING Orange Savings Account for over two years now, and have to say I am very pleased with the product. We currently have a number of accounts there for targeted savings goals. While higher interest rates can be found elsewhere, I value the ease-of-use from their online interface.

EverBank (1.77% APY for the first year).EverBank’s Yield Pledge Money Market Account offers the highest interest rate of the bunch. The 3-month introductory 2.51% APY is an even sweeter rate, but it only lasts those first few months. There are a couple limitations to consider. EverBank requires a minimum deposit of $1,500, and in any month where your balance drops below $5,000 you face an $8.95 fee. That shouldn’t be a problem with most fully-funded emergency funds, but it is worth noting.

WT Direct (1.66% APY for 60 days). WT Direct also offers a solid interest rate, but with more caveats than other banks. While they do not require a minimum deposit, or charge fees based on your balance, they do offer a lower tiered interest rate for accounts with less than $10,000 (1.66% APY vs. 0.15%APY). If you have over $10k in your emergency fund, WT Direct is a solid option.

Ally Bank (1.75% APY).The high-yield savings account at Ally Bank is a very attractive option, with no fees, no minimums, and no convoluted tiered rates based on your balance. Another nice feature is that they compound interest daily, rather than monthly or quarterly, as many other banks do. Ally Bank is also a leader in high-yield CDS, which provides yet another option for a portion of your emergency savings (check out the no-penalty CD to avoid paying fees to transfer money out in an emergency).

Again, the most important benefit of saving emergency fund money at an online bank is that is separated from your everyday accounts, limiting the opportunities to spend it away on non-emergencies. I still like the idea of keeping a local emergency fund of $1,000 or so tucked away at a local bank or credit union for smaller emergencies. This smaller, local emergency fund provides quick access without having to wait a couple days for online transfers.

*APY figures quoted are accurate as of 9/7/2009, but variable rates can change frequently

My grandmother was a prodigious coin saver. I remember one summer when I was about ten years old helping her roll dozens of rolls of coins. Sensing I was getting a little bored making my piles of fifty pennies, she took me back to her room where she had hidden shoe boxes of rolled coins under her bed.

She took the tops off those old shoe boxes and I remember peering into them and seeing roll after roll of quarters, nickels and dimes. She had whole boxes dedicated to pennies. There was easily a few hundred dollars in change under her bed.

The Coin Collector’s Christmas Club

“Nana, what are you saving all those coins for?” “For Christmas,” she replied. My grandmother didn’t work outside of the home after my grandfather retired from the Marines. Fortunately for her, my grandfather is a cash-only kind of guy, opting to spend cash over charging on credit cards (these were the days before debit cards were made popular).

He would come home after a trip to the store and empty his pockets on the top of his dresser. That’s when my grandmother swooped in and collected any loose change and was off to add them to her coin bank. She did leave a little pile of change my grandfather referred to as his “walking around money.” He always liked to keep a little change in his pocket.

After that summer of helping my grandmother roll coins I went with her to the bank where she cashed in over $300 in rolled coins. Part of the reason she took me along was to reinforce the habit of savings, but I really think she needed help carrying in those old shoe boxes!

Saving Coins in the 21st Century

Fast forward twenty-plus years. My kids now enjoy saving coins. Both of them have little electronic money jars that keep a running balance – something I’m still not sure about. While it is fun knowing you have $52.00 in change in your coin jar, just knowing that makes you want to cash it in for that $50 game you’ve been eying.

One of the things we struggle with now is finding a more efficient way to cash in that change. Some banks and credit unions have a change counting machine where you can dump in your change and make a deposit to your checking or savings account. Others require the change be rolled, and some even require you write your account number on each roll (have you seen the length of some bank account numbers these days?).

The very act of counting the change is time consuming, and most electronic sorting banks are expensive – the cheap ones never get the count right, or drop dimes in your penny column, etc. Of course, there is always those Coinstar machines. I admit I’ve carried along a jar of money or two to Kroger and dumped it in the Coinstar machine to put towards the grocery budget. Yes, I know it charges me an 8.9% fee, but considering how long it takes to count and roll the money, isn’t this worth it?

Coinstar does offer an option to redeem your change for an gift card or eCard (list of participating merchants) without adding the fee. But then you have to buy something online, pay for shipping and wait. 8.9% doesn’t seem so bad after all.

Are you a coin saver? Where do you keep your coins, and how do you cash them in?

John writes in with a question about parking medium to long-term savings for a car replacement fund.

Here’s my situation: my car is 7 years-old with only 60,000 miles on it. It’s in good condition and definitely dependable; I plan on using it for another 5-10 years (five being the least). I figure that after 7 years of saving I would have about $8,400 plus the trade in value  for my car  – we’ll say that’s $1,000 for a total of $9,400.

My question is what do to with those savings? I don’t want to just let them sit there in my savings account, although it does have a decent APY of 1.40%. Should I put a sizable chuck into a 5 year CD and then continue to ladder it in CDs of decreasing term lengths until I need  the money to buy my car? Or should I just put it in a money market account, or higher yield savings account?

I want to maximize the money earned on that fund with out totally sacrificing my ability to withdraw it should an emergency come up, or I need to buy a new car sooner. What would you recommend?

John also shared with me that he is nearly debt free and will begin this car replacement fund after building a small emergency fund. Normally, I would recommend investing money that is to be used greater than five years out in a mix of fairly conservative mutual funds, such as a broad index fund with a low-fee brokerage like Vanguard.

However, this case is a little different because John is dedicating these funds as a car replacement fund. As such, the need to use these funds could arise any time between now and the six or seven years he plans to save. My own experience with Murphy’s Law leads me to believe John’s car will die the exact moment there is a market downturn, causing John to pull out savings at precisely the wrong time.

Instead of dabbling in a risky market, I would suggest parking the savings in an online savings account or money market account, and possibly a CD. I’m hesitant to fully recommend a CD because John mentions the possibility of tapping the funds in an emergency. To do so, he’d have to pay a penalty for cashing out the CD before the term expires.

Sometimes we have to sacrifice a little earnings for peace of mind, and I think this is the case with John’s car replacement fund. I’ve taken the same approach with my own set of sinking funds and targeted savings accounts. For now, they are stashed away in an online savings account at ING Direct.

Funds I don’t plan to use for a number of years will soon be laddered in CDs to increase the rate of return slightly. I’m comfortable reserving market investments for long-term saving goals.

Do you have any additional advice for John? Where are you currently parking savings for large purchases?

Fortunately for savers, banks and brokerages have made it much easier to put savings on auto-pilot than it used to be. Before the days of online savings accounts and ACH transfers people actually had to sit down and write a check to savings, or deposit cash into their savings accounts. Sounds archaic, I know, but it did separate the disciplined savers from the free-spirited spenders.

Today we have a variety of ways to save for retirement, rainy days and big goals. But deciding just how much to save is the tough part. Financial gurus all have their own numbers – 15% for retirement, 10% of your overall income, half of your income – I could go on forever. However, deciding how much to save is a personal decision that looks more like a balancing act than a hard, fast rule. After all, there are many competing priorities for our money.

The 10% rule

One of the more established ideas is to simply save 10% of your income. If you earn $50,000 a year, under this plan you should be putting away about $5,000 a year into a variety of investments and cash savings accounts. 10% should not be enough to break your budget, but it doesn’t cause you to stretch very far either. I prefer to aim higher with my rate of savings, but how much higher?

Dave Says 15% For Retirement

Dave Ramsey, the popular radio and television talk show host, advocates putting aside 15% of your income towards retirement. Using our last example, that would be $7,500 a year on a $50,000 income, or $625 a month. Dropping $625 a month across your 401(k) and maybe a Roth IRA seems like a good idea, but it will be hard to pull off if you have an over-sized mortgage, credit card debt, or a couple car loans. That’s why Ramsey advises listeners to get out of debt and save a cash emergency fund first.

The 50% Plan

If I could go back in time and talk to my 20 year-old self, I would tell him to save 50% of his income from the first day on the job. For every year you save half your paycheck, and live on the other half, you buy one year of freedom from earning an income. Sure, saving half your income now seems ludicrous, but that’s because we’ve allocated our income to paying for our expensive possessions, like our house, our car and our hobbies. If we lived on half our income from the beginning, it would have forced us into a smaller home, a cheaper car and more frugal hobbies (and tastes).

What Percentage of My Income Is Going To Savings?

About 20%. That number should increase as we continue to pay off debt, but for now I’m content with an 80/20 split of paying off debt and slowly building our emergency fund. When the emergency fund is maxed, I’ll redirect the money going there to a Roth IRA. When that’s maxed I’ll begin investing in taxable investments and social lending at Lending Club to hopefully fund my early retirement. Somewhere in there I also have two kids’ college savings plans to fund. Like I said earlier, lots of competing priorities!

How about you? How much are you currently socking away in savings?