Or “how to avoid nickle-and-diming your own savings.”
When I first started getting my financial life in order, I tracked everything. I had heard something about how much you could save if you stopped drinking a fancy $4 latte every day… never mind that I *didn’t* spend anywhere near that on coffee! Nonetheless, I became obsessed. I went down the rabbit-hole of tracking every tiny expense, and feeling guilty every time I made a non-essential purchase. Coffee at the coffee shop this morning, instead of at home? WHAM! The guilt came slamming in. The phone case that I want is cheaper by a $2 if I get the color I don’t want? WHAM! Guilt and indecision time… over two dollars!
Every little purchase would trigger guilt and stress. And at the end of the month, when it came time to decide what to do with what I’d “saved” in my checking account, I would be hit from both sides: On the one hand, I’d feel like I should have saved more. On the other hand, even the act of transferring the money out of my checking account felt like spending, and left me feeling anxious that there wasn’t enough in the checking account anymore!
I’d always known that it was possible to split my direct-deposit to go to multiple accounts. And I’d seen the “automatic transfers” option on my investment account. But it always seemed like too much of a hassle to get it set up and to keep track of it.
Then one day, I decided to give it a try. Setting up the direct deposit turned out to be a piece of cake. The automatic transfers to the investment account were even easier. And while I was at it, I increased my 401(k) contributions to 20%.
These days, what’s in my checking account is, for the most part, available to spend. I don’t have to worry about the little things anymore beyond double checking that my account balance can cover it. I can rest assured knowing that my savings plan is already on track. If I choose to save a few more dollars here and there when the opportunity comes up, then great! But the dollars that I’ve budgeted for savings have already been taken care of.
I can hear the objections now. And yes, there are some basic ground-rules and pre-requisites that need to be in place for this to work.
- Emergency savings – Don’t shunt all of your savings into an illiquid or untouchable account until you have a sizable emergency fund. I typically recommend three to six months’ worth of living expenses, but it depends on your situation. If you’re self-employed and/or in a seasonal industry, you’ll probably want to have a bit more in your emergency fund. This fund should be easy enough to access that you can use it in the case of a real emergency, but not so easy that you can do a “one-click” transfer back to your checking account when you see a “killer deal” on a 90″ 8k TV. And of course, this account should be a true savings account, earning you interest on your savings and NOT accessible via checks or debit card.
- Have a budget – My typical advice is to take action right away on any plan, so that you can avoid procrastination and build momentum. However, setting up an automatic savings plan requires that you know some specifics about how much you can realistically afford to save. Obviously, you want to be sure that all utilities and such are accounted for so that you can pay your bills without stressing about bounced checks. But going the other way and saving too little is shooting yourself in the foot. Don’t hobble your tomorrow by being lazy today. Make a budget. If that sounds daunting, or you’re not sure where to start, I’m happy to help.
- Credit cards – Reward points and cashback cards can be very tempting, but using credit cards effectively is an advanced technique that I do NOT recommend doing when you first set up your savings automation. If you’re already using credit cards and you are one of the rare individuals who NEVER carries a balance on ANY cards, then you might consider adding credit cards back into the mix after a few months of automated savings, when you’re sure you’ve got any kinks ironed out. Otherwise, save the travel-hacking and credit card churning for once you’ve gotten everything else in order.
- Where does it go? – Automatic savings only helps if you have a goal and a destination for the funds. Know your options. Do you have access to a 401(k) (or Solo 401(k) for the self-employed)? How about an IRA? Do you have a savings account with a reasonable interest rate for your emergency fund? You might also consider setting up a second checking account for regular bills, rent/mortgage, etc. so that your primary checking account becomes a true “spending account” that you can use for all daily purchases knowing that there’s nothing else that needs to come out of there.
Setting up an effective automatic savings system does take a little bit of upfront work and planning. Once it’s up and running though, it can make things so much easier!
Ready to get started?
Contact me for a complimentary budget review and savings plan.