Why Ramit Sethi Believes Sub-Savings Accounts Are Key to Paying Off Big Expenses

You'll be better prepared for big bills when you follow this approach.

Life is full of big expenses that are going to come up at some point, even if you're not sure exactly when. If you're not ready for them, they could put a dent in your savings or even cause you to go into debt.

Financial expert Ramit Sethi has an interesting method he suggests to prepare for this. Instead of waiting for those bills to hit, he recommends you "play offense" by creating sub-savings accounts for expenses before they happen.

How sub-savings accounts work

A sub-savings account is a type of savings account that you create for a specific future expense. You could set one up for practically anything, but here are a few examples of what you could save for:

• Down payment on a home
• Wedding
• Honeymoon
• Travel
• New computer/tablet/smartphone
• Updating your wardrobe

So, instead of putting all your extra money into one big chunk called "Savings," you can get more strategic. You decide what you want or need to save for, and then you distribute your money toward those goals.

Advantages of sub-savings accounts

Some people might wonder what the point is behind sub-savings accounts. You are, after all, saving the same amount of money as before. The only difference is that you're earmarking it for specific things.

But that's a significant difference. There are several advantages to using sub-savings accounts:

• Your savings are better organized. It's much easier to keep track of your progress on financial goals when they all have their own accounts. You can quickly check how much you have saved for each goal, which you can't do if they're all in a single account.
• It encourages you to think about and plan for future expenses. When it's time to pay those expenses, you won't need to scramble to come up with a solution.
• You're more likely to hang on to the money you save. It can be pretty tempting to spend money that's just sitting around in a savings account. Once you've set money aside for a specific purpose, like a down payment on a home, it becomes harder to spend for anything else.

Getting started

To start using sub-savings accounts, the first thing to do is figure out your savings goals. You can pick anything you want and set up as many accounts as you want. After you have a goal, the next step is to decide how much you're going to save, both monthly and in total.

Let's say you've decided to set up a travel fund. How much do you need for the trip you want to take? And how much can you realistically save per month toward this goal? With that, you can iron out the details of your savings goal. For example, you could decide you're going to open a bank account for your travel fund, and then save $250 per month for 12 months to reach a goal of $3,000.

To set up the account itself, you can either stick with your current bank or open an account with a new one. If you have a bank you like and it allows you to set up multiple savings accounts, then it probably makes sense to stick with it.

However, make sure to compare interest rates on the best high-yield savings accounts before you decide. Interest rates can vary quite a bit, especially between online banks and brick-and-mortar banks. By choosing the bank with the highest rates, you'll reach those savings goals faster.

The final and most important part is to set up an automatic transfer to your new sub-savings account every month. This is one of the best ways to grow your savings, because it ensures you save that money instead of saving it.

While you can save for all your big expenses in one savings account, Ramit Sethi's method of using sub-savings accounts has its benefits. If you sometimes find yourself worrying about expenses or having trouble paying them, sub-savings accounts are worth trying.