Separate Savings

I’ve talked about this quite a bit before. – the fact that saving money is a two step process and that paying less for something doesn’t necessarily mean that you have saved money.

After you have found a way to cut an expense, you actually have to place the difference between what you were paying (or would have paid) and the new price into a savings account (toward debt reduction or long term investment). The most effective way to accomplish this is to take any money saved and separate it out into a specially set-up savings account. While taking a small reward out of any savings you derive from this series (for example, 10% – 20% of the savings achieved) to help m

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6 Responses to Separate Savings

  1. Gabe says:

    Fantastic! And near and dear to my heart.

    I’ve found that if you turn saving money — i.e., ALLOCATING a portion of your money into a bucket (account) in which the money will STAY — into a daily online game, it’s easy, fun… and astonishingly satisfying.

    Standard disclaimers apply, of course — THIS IS NOT ADVICE, just a cool way of thinking about money.

    Step 1: SIGN UP FOR ONLINE BANKING. Every consumer bank has free online banking these days. If you haven’t done so already, sign up and get yourself a username and password. Online banking = CONTROL over YOUR money.

    Step 2: SET UP A SEPARATE “SAVING ACCOUNT.” As far as I know, most banks will be happy to set up a separate money market or similar savings account for you. All you have to do is call and ask. You may even be able to set up the account online (without having to speak to an actual human being, which is a plus in my book!). I like to call it a “SAVING ACCOUNT” — not savingS, but SAVING. I’m quirky that way.

    [[ NOTE: BANKS MAY IMPOSE LIMITS ON THE NUMBER OF TRANSFERS INTO AND OUT OF ACCOUNTS. Check with your bank on whether there are limits on (a) the number of transfers you may make per month out of you primary checking account (the bulk of the $$ you're going to put into your Saving Account will come from checking, so if the bank's going to charge you a fee each time you transfer from checking, or place a limit on the number of time you can do it, it may not be worth it; (b) the number of transfers you may make per month into your Saving Account, because, again, if the bank limits this, it may not be worth it; and/or (c) the number of transfers you may make per month OUT OF your Saving Account (depending on the nature of the Saving Account, for tax purposes you may be limited to, say, 3 transfers a month out of the Saving account -- just keep this in mind, if you're saving up for something where you might need to cash out periodically). ]]

    Step 3: DETERMINE HOW MUCH YOU CAN AFFORD TO PAY YOURSELF. This is the really fun part. Make a few simple calculations to figure out how much $$ you can “safely” transfer from your checking account to your Saving Account EACH DAY (INCLUDING WEEKENDS!), and still be able to cover your reasonable daily expenses and in-clearing checks. For example, you may be able to transfer $10, or $20, or even $50 (or more, depending on your circumstances) from your checking to your Saving Account EACH DAY (INCLUDING WEEKENDS!), and still have enough in your checking account to cover food, clothing, reasonable entertainment, the cable bill, the gas bill, rent/mortgage, etc. It’s up to YOU to figure out how much you can transfer EACH DAY (INCLUDING WEEKENDS!) from your checking account to your Saving Account and still get by. That amount = your “DAILY TRANSFER.” And remember: AIM HIGH! If you think you can VERY safely transfer $20/day into your Saving Account, aim higher… and make it $25 or $30. Toward the end of your “fiscal month,” you’ll know whether you’ve aimed TOO high (see STEP 7, below).

    Step 4: START PAYING YOURSELF TODAY. Right when you’ve figured out the Daily Transfer that you can live with, make your first transfer. Log on to your online banking account, select Transfer, and transfer an amount equal to your Daily Transfer from your checking account to your Saving Account. It’s that simple. Provided…

    Step 5: REPEAT STEP 4 EVERY DAY (INCLUDING WEEKENDS!). I cannot stress this enough. Your Daily Transfer should be the FIRST thing you do online, every day (including weekends! have I repeated this enough?). Make it a habit. Make it as much of a habit as your daily coffee. Make it such a habit, that you’re GRUMPY until you’ve done it. Saturday and Sunday, too, buddy.

    BONUS TIP: ROUND UP!! If your daily amount is $30 and you have, I don’t know, $2165.81 in your checking account, round up your Daily Transfer a bit. Make it $30.81… or if you’re feeling adventurous, make it $35.81.

    Step 6: WHEN YOU MISS A DAY, DOUBLE-UP. OK, sometimes you’re on vacation and you’ll miss a day, or two, or three. Really, really try and keep this to a minimum (but do keep in mind that there are security risks in conducting your online banking from, say, an internet cafe in some random spot, so keep that in mind, too). If you *DO* miss a day, pinch yourself (even if the miss was unavoidable… if you’re doing this right, you’ll be sufficiently grumpy for missing your Daily Transfer, and that’ll be punishment enough), and when you log on next, DOUBLE UP. If your Daily Transfer was $30, and you missed a day, your next Daily Transfer should equal $60. There is no such thing as “skipping days” here, folks. Daily means DAILY (including weekend! gotcha again).

    [[ NOTE REGARDING "AUTOMATIC TRANSFERS": To me, the whole point of this method is for you to take DAILY CONTROL of your money. In my experience, logging on and making a daily transfer leads to a MUCH richer experience than having your bank control the process by making a weekly or monthly transfer. It's the "incrementality mentality" -- when you yourself are making the daily transfers, you're really building something, brick by brick. (Also, I don't know of any banks that let you set up a daily automatic transfer -- I could be wrong.) ]]

    Step 7: WHAT IF I START TO RUN OUT OF MONEY IN MY CHECKING ACCOUNT? As soon as you start using this Daily Transfer method, you’ll be face-to-face with your cash situation every day, and of course, you will notice that your checking account appears to be, how shall I say, “leaking.” Well, of course it is: you’ve punched a hole in the bottom, with your wacky Daily Transfers! But you, you savvy person you!, you immediately placed a bucket under the “leak,” and that bucket is your Saving Account. (“It is far, far better for a checking account to leak into a Saving Account, then for it to evaporate into lattes and thin air.”) In any event, if you notice toward the end of your fiscal month that you are on the verge of having TOO LITTLE money in your checking account to pay the bills and your reasonable daily expenses, SLOW DOWN. Don’t stop your Daily Transfer, just “shave” it a bit. Maybe you can manage only $15 a day for the rest of the fiscal month, rather than $20. Heck, maybe you can manage only $5. Only YOU know how much you can afford to pay yourself. Aim high, but BE REASONABLE. There’s no reason to bounce a check, EVER. And don’t beat yourself up — diligence does not require self-punishment. And when you get paid again, recalibrate your Daily Transfer. If you can, bring it back up to its original, pre-slowdown amount.

    BONUS ROUND: MONEY YOU “SAVE” (BY GETTING BARGAINS) GOES INTO YOUR SAVING ACCOUNT ON THE SAME DAY YOU SAVED IT. When you “save” money on a purchase or payment, for example, if you’ve found a great bargain on shoes that you coveted (and needed!) and paid $30 less than you would have paid otherwise, log on to your online banking account, transfer that $30 from your checking account to your Saving Account. Do this the same day on which you “saved” that money — don’t wait for the item to be delivered in the mail, don’t wait for tomorrow. The KEY is SAME DAY.

    The method above can be a fun, almost addictive way to watch your savings groooooooooooooooow on a daily basis. You will be astonished at how quickly it will happen, and how second-nature the whole process will become. And just think, you’ll be able to teach your kids to do the same thing (only they’ll undoubtedly be doing it with virtual reality goggles and some sort of brain-to-bank interface).

    One more thing: that money in your Saving Account? If you can, LEAVE IT THERE. As the old Christmas song sort-of goes, “Let it grow, let it grow, let it grow.”

    – Gabe

  2. SteveL says:

    I have too many bank accounts:
    1. Wamu (for general purposes)
    2. ING Direct (general savings)
    3. Bank of America (additional savings)
    4. Wells Fargo (for my online business)
    5. Emigrant Direct (for my business savings)

    I think it is a good process as it makes me take a close look at my money and helps me break everything up. I would like 1 more account that I can put 10% of everything I make into for retirement.

  3. VancouverGurl says:

    I also have three separate accounts with three different banks. But I’m really sure why I’ve done this and obviously it hasn’t contributed to my saving efforts — actually, two of these accounts are now inactive because I’ve neglected them.

    Would you suggest just having two or three accounts with ONE bank? Or does it matter.

    Thanks.

  4. pfadvice says:

    It really depends on what will work best for you. I have a standard brick and mortar bank account for everyday expenses and an online bank for savings – a certain amount of money automatically gets transferred into the online account each month and then I manually add savings I have found throughout the month.

  5. VancouverGurl says:

    Thanks. It’s probably not about the number or type of account I have but whether or not I use it to save. I find myself extracting cash from both chequing and savings accounts by the end of the month. Or using savings to pay for larger, unexpected sums at times — even though I know I should not touch the savings acct. After a few times of this cycle, I pretty much give up until I feel guilty about not saving and start all over again.

  6. Sandra says:

    I read most of you comments and they’re all very helpful. I am going to start calling my cable and internet provider next week, hopefully I’ll get a good deal. Your suggestion about putting the extra savings on a decided account is awesome. Thanks so much for doing this, we need this type of advice specially now that the economy is terrible.

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