YNAB BLOG

Putting Your Washingtons (Benjamin's?) to Work

Hello Savvy Saver!

This week we won’t talk so much about saving money.  We’re going to talk about putting the money to work that you already have.  I’m going to talk about managing your cash flow in such a way that you remove the temptation to spend money that you shouldn’t be spending, maximize your interest income, and minimize your hassle. This principle dovetails nicely with YNAB’s Methodology, specifically Rule Three where we want to Save for a Rainy Day.  I’ll do a quick review of that rule, and then we’ll dive right into the nuts and bolts of this.

A Quick Review of Rule Three

The job of Rule Three is to take your current life situation (you may recognize this from The YNAB Way):

and make it much more manageable. The high points of stress are correlated with low points in your cash flow.  Times where a large (expected or unexpected) bill arrives and you stress out.  When implementing Rule Three, you take those larger, anticipated expenses and you break them down into monthly, bite-sized chunks. If you’d like to spend $600 on Christmas this year, then you budget $50 into your Christmas fund each month.  If your car is old and needs constant repair, then you should be budgeting $100 per month into your Car Repair fund, turning a potential crisis into a mild inconvenience.  If vacation is calling your name, and you’re thinking it’s going to cost $850 — happening just five short months from now, then you’ll need to put $170 into your Vacation category each month for the next five months.

You take those large expenses and you make them manageable, ensuring that you have the funds when the due date comes.  Your life then looks like this:

Notice there are still ebbs and flows.  Those are the ebbs and flows of Life and they’ll always be there!

Now, let me share a little secret with you.  If you were a bank manager and you could pick to hold the checking account of a YNABer, or your standard Joe Schmoe, you’d pick a YNABers checking account over Joe Schmoe’s checking account every time.  You’d want to pick a YNAB devotee that had been using it for at least six months or so.  Why?  Their account would be brimming!

Seriously, when you’re following Rule Three, you’ll develop some serious padding in there.  Your Christmas fund will grow to several hundred dollars, your vacation fund will be bursting at the seams, your car repair fund (crossing your fingers here) just keeps getting bigger…the list goes on and on.  Where you once had thirty-two dollars (and twelve cents, thank you very much!) you now have thirty-two hundred dollars, or much more.

For some (spouses as well), this can be a rather large temptation.  Here’s how you remove the temptation, and make some money to boot.

The Plan

Step 1: Open a High-Yield Savings Account

I happily recommend ING Direct .  I’ve been using them for the past eight years and they are phenomenal.  Their interface (which you’ll see in a second) is drop-dead simple, they let you open multiple accounts in seconds (you’ll see why that’s important in just a moment), and their customer service is excellent.

You can see from the interface that everything’s very simple (I have my Emergency Fund in there, the kids’ savings accounts, and some old float accounts I previously used):

Let’s say I have a Rainy Day fund category for Christmas and the amount is becoming quite sizable in my checking account…I’ll make a separate savings account for it by clicking Open another account, select Orange Savings Account, then click Open Now, choose the type, the Nickname (I’ll name it Christmas) how you’ll fund it (another ING account, or your linked checking account), and then click Open Account…done!

Step 2: Set Up a Scheduled Transfer

So you can see I have my Christmas account set up in no time.  My next goal is to set up a scheduled transfer:

It’s a pretty nice little setup.  I want to start the transfer at the beginning of March and have $1,200 in our Christmas account by the time Christmas rolls around (it’ll be a lot merrier this way!).  Notice that I entered the End Date of 12/01/2009.  So once I’ve hit my target, the transfers stop.  All that’s left to do is simply budget the $120 per month into my Christmas category and record the transfers in YNAB.

You can set up these accounts and transfers in minutes so there’s really no excuse.  Get started with Car repairs, vacation, property taxes, gardening expenses, anniversaries, car insurance, etc.  It all depends on your preference.  If you’d rather keep it all in your checking account and have a huge balance, that’s okay too :)

The advantage to this strategy is that you’re allowing your saved money to do something for you while it sits there waiting for its job to roll around.  It’s nothing astronomical, but a bit of high-yield interest never hurt anyone.  If your Rainy Day funds end up averaging a balance of $5,000 throughout the year, you’re looking an interest income (for doing nothing except being smart about it) of:

Rate Income
2% $100
3% $150
4% $200
5% $250

I don’t think those amounts are anything to sneeze at!  Especially since you’re already doing the budgeting side of things–you just need to change the physical location of the money and you’ll get a bonus depending on your interest rate.  (A bit of a caveat on interest rates, I’ve seen very high yields that require minimum balances, require that open a checking account that receives direct deposit, go lower after some introductory rate, etc.  ING just gives you the rate and calls it good.  It’s never as high as the teaser rates, but it’s always competitive.  Now, I’m an ING fanboy, but I’ve also heard good things from people about HSBC and EmigrantDirect.  Pick your poison!).

Your Money at Work

This isn’t some groundbreaking tip that will save you thousands of dollars, but it’s likely worth a few hundred.  On top of that, the thought process that you’ll enter into is important — the habit of having your money do useful things for you is a great one to develop.

11 Responses to “Putting Your Washingtons (Benjamin's?) to Work”

  1. Ben

    Thanks again Jesse, this tip is a fanastic idea. I am also a fan of ing and the great thing is this tip is applicable internationally. Thanks and keep up the great work mate. Ben Forster (Australia)

  2. Joosh

    I use my ING account this way – and follow T Harv Ekers ‘6 jars’ technique. the goal is to live of no more than 50% of your income. That 50% is one jar called ‘Necessites” for rent and food etc.. The other 5 Jars I have setup as ING accounts

    10% FFA > “Financial Freedom Account” this is to be used for investing in passive cash flow structures.
    10% Give > church, gifts, humanitarian efforts etc.
    10% LTSS > “Long Term Savings for Spending”. I have LTSS christmas, LTSS house down payment, etc.
    10% EDU > the education fun – for continuous learning.
    10% Play > for spending on something extravagant so you dont feel like you can never enjoy yourself

    of course you can tweak these however you want – but I feel like its a nice way to cover all areas of life.

    • Jesse

      @ Kyle, yep. I’ve been affiliated with ING for the better part of five years. I was previously affiliated with EmgirantDirect (no longer) and have just started looking into HSBC. I’m also affiliated with Amazon so (if I remember) links to books gives me a commission as well. Standard blogger affiliations really. I do only recommend services I actually like and use personally. Thanks for the question!

  3. Greta Kidd

    Hi there! I would also recommend connecting with a local credit union too! For example, our credit union offers a high-yield checking account… This is a great point to make! Greta

  4. Angela

    I totally agree with the credit union thing. Our reward checking is @ 4.51% up to $25K. YNAB allows me to sort out what the cash is for. Simple. The ING thing is a good alternative.

  5. Scarlett

    Do you know anything about USAA and their rates? Thanks!

  6. Amy

    There are several local credit unions where I live that are offering 4.5% on their checking accounts. You just have to have at least one direct deposit each month, use a debit card 12 times/mo and get eStatements. They have no monthlly fees, refund foreign ATM fees (those charged by using an ATM that isn’t owned by my credit union’s network) and pay the interest up to $25k. I’m still trying to grasp the whole YNAB program and need to force myself to sit down and get started (I’ve owned it for more than a year now and have probably lost hundreds of dollars by not using the system yet).

    • Jesse

      @Amy, my only hangup with those personally is the required direct deposit. Sometimes I don’t run payroll for a month or two, so I guess it would disqualify me. For the vast majority of people though, the local credit union sounds like a great bet.

  7. Everett

    Jesse, are you familiar with Shore Bank? I’ve been looking at going with them as their interest rate is higher than ING’s and seems to be similar. If you or anyone can give me pro’s or con’s about them I’d appreciate it.

    Eagerly awaiting the release of YNAB for Mac.

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