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:
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.
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):
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:
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.