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:
- 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.
- 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 And I have to say, this has been working for about a year now and many times we have NOT withdrawn the money from ING and have steadily increased our savings to over $2,100.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?