For today’s post I’d like to share with you a tool that has really helped me grasp the concept of saving for retirement.

Compartmentalization

Separate Accounts

– Don’t keep your retirement money in the same account that holds your emergency funds
– Keep everything you’re saving for in separate accounts
– INGdirect.com allows you to create multiple accounts online
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Equity Goose

– Keep an “Equity Goose” (read “The Equity Goose and the Cash Flow Golden Egg” for more information) that you never take money from
– Only use this money to invest in assets that will cash flow

Emergency Funds

Most people have one savings account that they use for their retirement as well as for their emergency fund. But what ends up happening is they’ll save and save and save until an emergency happens and they have to draw the account down.

Then they try again- saving, and saving, and saving, until they decide to go on vacation. After this next dip, they continue to save until another emergency occurs, like they lose their job. So because their retirement account doubles as their emergency fund, it never builds and never benefits from compound growth.

Equity Goose

The solution is to make sure you have at least two savings accounts. One will be untouchable- what I like to call the “Equity Goose” (see below for a link to another article describing the Equity Goose). The Equity Goose is basically cash that you never access. The only function of that cash is to produce more cash for you either in an interest bearing checking account or through real estate or another investment.

So now you have your long term equity goose which just continues to grow exponentially and your short term accounts for all other things. You should have a separate emergency account that will naturally rise and fall as emergencies happen, and separate accounts for everything else you’re saving for like vacations, a new car, or college educations for your children.

This is what’s called compartmentalization. Remember that the key is having one account that you can never touch. The only purpose of that account should be to buy assets that produce cash flow for you.

Separate Accounts

A really good resource I use is a bank called INGdirect.com. I don’t make any money from advertising with them, but what I like about them is that they have a higher interest rate (right now about 1.5% which is really high compared to most money market accounts). The other thing I like about them is that they let you open up several accounts online just by clicking a few buttons. This is a lot more convenient than having to sit down with a banker and getting funny looks when you want to open 6 accounts.

So that’s what I do- I’ve got my Equity Goose account, an account for vacations, and separate accounts for asset type goals or things that I want to buy.

I hope you’ve learned from this tip. If you can learn how to compartmentalize your accounts, it will make you a lot more money in the long run and set you apart from 90% of Americans.