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“Accidental” Savings

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Oops (Wine)Reader Joe recently shared a clever little tactic he and his wife use to “accidentally” save money. The strategy, in brief, involves Joe regularly transferring money from his checking to his savings to cover large planned annual and semi-annual payments such as insurance. When the time comes to actually make the payment, he’ll make it out of his regular checking account if he can cover it there. If he can’t, he pays from the savings account he’s made regular payments to. If he can pay for it out of the checking, then he has just “saved” himself the amount of the payment in the savings account.

In His Words

Here is an explanation in his words and then I’ll talk about why I like this strategy so much:

Jim, I’d like to share our ING strategy with you, I’m curious if anyone else is doing this:

Jen and I set up several ING accounts for some recurring expenses that come up once or twice a year. Then we set up an automatic deduction from our checking account monthly that will give us the total we need by the time the bill comes due. For example:

  1. Garbage collection: If we pay for 11 months, we get one month free! That would cost us about $425, so we put $35/month in our ING account and collect interest until the payment is due.
  2. Life Insurance: We pay a total of about $700/year between both term policies. So $60/month comes out of our checking account monthly.

And so on……….we have 6 accounts in all. And the money is gone from our checking so we honestly don’t even miss it.

We typically do this for annual or semiannual bills that would total anywhere from $300–$1,000. In the past, we’ve found that if things are tight, these bills (though not terribly huge) tend to show up at the worst times and can disrupt our budgeting and bill-paying in the short term. But this way, the bills become part of our budget every month, just spread out so it’s easier to handle. Otherwise with bad luck we might see several of them come due at the same time!

Here’s The Twist: If the bill comes, and we DO have the money in our checking account, we just pay the bill and leave the money in our ING account to keep growing and earning interest until the next time we may need it. And I have to say, this has been working for about a year now and many times we have NOT withdrawn the money from ING and have steadily increased our savings to over $2,100. We can use this money as part of an emergency fund, or as a downpayment on our next car (I’m dreaming of an electric plug-in hybrid).

Why I Like It

There is nothing exceptionally novel about the idea, it’s the same thing many people do to help manage large regular payments. By dividing out the single payment across multiple payment periods and saving it in a high yield savings account, you are maximizing how hard your money is working.

The twist that Joe mentions is a nice added wrinkle. It’s in part possible because some of the bills are small, only a few hundred dollars, but it’s still a good way to approach saving. I think there are many different techniques you can use to save, whether it’s this one or regular 10% transfers or snowflaking, and it’s best to find the one that fits your financial situation and your personality.

What do you think of this idea?

(Photo: xt0ph3r)

{ 15 comments, please add your thoughts now! }

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15 Responses to ““Accidental” Savings”

  1. Miranda says:

    I love this. I do something similar as well. It’s a great way to earn a little extra interest, and you are properly prepared for the expense. I do the same with the quarterly taxes I pay for my writing business.

  2. CK says:

    This is exactly how we do our garbage, life ins., and quarterly water bill. Another twist on pay yourself first and you don’t miss what you don’t have.

  3. Amy says:

    I did this for my semi-annual auto insurance payment and had the same result….I had the money in the checking account to pay the bill and the money stayed in the savings account.

  4. Stacey says:

    I do love that he’s thinking ahead and saving for payments each month. So many people panic when they get a large annual bill. You got the bill last year – didn’t you see it coming around this year, too?

    He didn’t mention the holidays, but this is also a great way to save for gifts and other periodic expenses. Set aside a few dollars from each pay – you won’t even miss it. Once the gift-giving ocassion comes around, you should have a tidy sum of money to spend.

  5. Patrick says:

    I wish that I could pay my house taxes and hoa fees this way. I could save a little extra money, but instead I have to escrow them away. Escrowing works for most people, but I usually plan well enough so that I would be able to pay them off every 6 months or a year.

  6. Michael says:

    The concept works. I did this in the 80′s to pay off a 10 year ballon mortgage. I could have refinanced, but felt that I had already paid enough interest for the home and decided against it.

  7. sara l says:

    I think the twist makes a smart strategy great.

  8. Kenny says:

    Great idea for the folks that are starting out. Please make sure that you are NOT getting into a trap of paying the bills in such a way that the insurance company is charging you fees cause you did not pay the LUMP SUM when it was due. There is a hidden charge there that might be overlooked by paying semi-annually or quarterly or even worse, monthly.

    In Jim’s case he is saying he is collecting all 12 months worth and paying it as a lump sum.

    Having multiple ING accounts is great, but having ANOTHER account where you have NO WAY to access the money (electronically or by writing checks) is even better. Here is what I mean: Transfer some of the excess money in to an account like HSBCdirect where you do not have a check book and will NOT setup an online transfer. You actually have to call them to get a check disbursed from them. This is called Hidden Money that may work for some. It worked great for me when I was in my 20′s and pumping money to Citibank in South Dakota. They would provide me postage paid envelopes at that time (no more) and I would send my rebate checks, excess funds etc over there. When I bought a house, I had collected $36,750 over there!!!!!

    Just some cool tricks that our minds know, but also know the pain of the process to get it, and therefore, it stays in savings!!!!! Mind games for the better (I call it).

    I give the above advice to ALL YOUNG people, esp. if they are not strictly disciplined with money. Gen X has a lot of these candidates, and I have two growing up in my household that are starting to become Mall-Kids!!!!! But, I am working hard on them and teaching them that America’s Past Time of “Spending Money” or “Going Shopping” is the worst activity and that is why we have the current state in the eco.

    Later…..

    Kenny

  9. It’s a great idea. I too have what I call a Freedom Fund but I like the added twist Joe has. It sounds like a great way to keep that extra in your savings account when you actually have enough to pay for those extras.

  10. Meg says:

    This is what I do too, except I only have one savings account. Each month my “savings” is actually savings + car insurance + property taxes + home insurance.

    When I get my annual bills they are usually too big to cover just from checking, but since some of these bills are due around the time I might get birthday or Christmas money, a bonus, or a tax refund, I will always use those funds first rather than dipping into savings.

  11. Joe says:

    This is Joe, the OP. Just a quick update on the strategy Jim was nice enough to post–we are now up to $2,600 and counting! Not too bad for our one-income family. It’s working well enough that we want to save even more, so we are using coupons now and checking sites like Retail Me Not before shopping online. I am also raising my 401k contribution to 6% of my salary, and I’ve increased the monthly amount we send to my son’s 529 plan, and slightly increased the extra principal payment on our mortgage.

    I think my favorite result of this effort is the satisfaction of seeing our small balance grow steadily, which has led to savings momentum in the other areas I mentioned above. We talk about saving more, and celebrate our successes. One of the 6 ING accounts we have is also for Holiday Shopping, as Stacey mentioned. That’s another one we haven’t touched, because my wife Jen is shopping here and there throughout the year when she sees great sales, so it’s been spread out and now we don’t need to use the Holiday account either. We’ll just keep it going for next year, in case we need it!

  12. Gates VP says:

    (Wow, I’m late to the game again.)

    Look, it’s obvious that this approach “works” to some. However, it’s a completely backwards way to solve the problem and it becomes useless when you have too much money in the account.

    Here’s the deal. Most of us have these “non-monthly” recurring expenses. (Typically insurances and utilities) You’re definitely doing the right thing by putting aside monthly monies.

    But where’s the “car savings” and the “house savings”? I mean, aren’t those equally important and inevitable? Sure, they may not be timed at regular intervals, but your car is going to need new tires and your water heater is going to need replacement, right?

    Tires and maintenance cost an estimated 5 cents / mile and that’s just over the first 5 years of the car. If you drive 10k miles / year, that’s $40+ / month (~$500 /year). Those driving used cars can reasonably expect higher maintenance as time wears on.

    (for those in US, let’s not forget inevitable medical costs)

    Either way, back to the original point. This is a method to accumulate some money in the bank and to re-train your brain. But it’s really a short-term hack and not a long-term strategy. I honestly think it’s destructive to the long-term goals that we’re “selling ourselves” on this alternate strategy rather than trying to “start as we meat finish”.

    Let’s put it this way, if I’m already meeting my savings goals, then why do I need this “hack”. I’m already achieving my goals and paying my bills and I’m spending my cash flow (because that’s what it’s there for).

    In the example above, Joe is not meeting his savings goal b/c he’s spending his cash flow to cover the bills and “protect” his savings. Maybe it’s just my personal goal, but I like consistent cash flow. If you’re trying to build a real savings buffer, then you need to pull out a little more each paycheck instead of binging and purging.

    Of course YMMV.

    • AverageJoe says:

      Gates VP:

      Your situation sounds very different from mine. It sounds like you’re already meeting your savings goals, and I certainly don’t have the problem of having too much money in this (or any!) account. Congrats on paying your bills and saving out of your cash flow, that’s what I’m working towards.

      I don’t understand the “binge and purge” comment though. The reason this strategy works for me is that it avoids those lumpy expenditures. We are now up to $3,200 in savings, not bad for a “hack”. I am hoping to continue along this way, until we have 6 months of expenses saved up.

      Segregating the 6 accounts for each purpose helps me to organize my thinking and finances by thinking longer term. Yes, we do have a Car Maintenance account, as well as a Car Insurance and Home Maintenance account, and a Vacation Account. And as we pay for car repairs here and there and don’t use the Car Maintenance money, I’m building that up to be a downpayment on my next vehicle.

      So in my mind we ARE thinking long-term. What does “start as we meat finish” mean, btw?

      • Gates VP says:

        “start as we meat finish”, yeah that’s a pretty bad typo, “start as we mean to finish, was the intended wording there.

        But, to your questions: in my mind we ARE thinking long-term

        OK, let’s assume that you ARE thinking long-term. We’ll also assume that you have achieved your goals, you have 6 months of expenses saved up. Your various “inevitabilities” are covered (car/house/health), in fact, we’ll assume that you’re successful, you’re a full year ahead.

        Now, let’s say that your premium comes due. That’s OK, you have money in the bank saved specifically for this purpose. Heck you have more than that money, b/c you’re already saving for next year’s premium. It’s the perfect setup right?

        But wait, you also happen to have that much money in your checking account. Now you were thinking about “spending” that money on a weekend spa package, but you’re using your “Twist” principle detailed above. So instead of pulling the money from the savings, you’re going to pull it from your checking.

        Great, so now you’re two years ahead in your premium. B/c you paid for this year’s premium, but you still have next year’s premium in the bank. Pure genius, right?

        Except you didn’t get the weekend at the spa. And if you keep doing this with positive cash flow, you’re just going to keep saving more money, right?

        How many years worth of insurance and garbage do you really need saved up?

        It’s obvious that “the twist” is only useful to a certain point. Not for the long-term, just the short-term while you “build your buffer”. Once you’ve filled up your buffer, then you have to undo this habit or you end up “accidentally saving” too much money.

        “Binge & Purge”
        Your cash flow isn’t consistent.

        Let’s say that garbage costs $20/month ($240/year) and that you get $500/month cash flow (after paying out your savings). Let’s assume that garbage is due in October. Here’s what your cash flow looks like:
        - Aug $500
        - Sep $500
        - Oct $260
        - Nov $500

        Suddenly, you eat out less every October, b/c you have less cash flow. Now, if you have even a couple expenses like this then your cash flow is all over the map.

        I mean if you really wanted to save that $240 dollars, why not just give yourself $480/month instead of $500?

        And that’s what I don’t like about “the twist” method. You achieve your goals backwards. Instead of setting a savings goal and then setting aside that money in advance, you do it in reverse. Look, it’s the same thing with the Bank of America “save the change” initiative. It’s “after the fact” saving instead of “in advance” saving.

        Let’s pull from the Covey “7 Habits” mindset. If you “Begin with the end in mind”, then you already have an idea of how much money you want to save. If you have “Put first things first”, then you’re already putting enough money aside every month.

        Questions
        1. If you’re already saving enough money to meet your goals, why do you need to save more?
        2. If you need to save more money to achieve your goals, why do you need to “twist” yourself into saving it? Why not just save that money right away?
        3. If you’re saving money without a goal, what are you saving for? Doesn’t that just transform saving into more of a “hobby” than anything else?

  13. It sounds like the reason SmartyPig was invented. I think I accidentally saved close to $1000 now.


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