Category Archives: Saving

How to Automate Your Savings

Last week I wrote about how I’ve tricked myself into living with a paycheck to paycheck mentality by automating my savings, and encouraged everyone to do the same. I thought it might be useful to talk a bit about how to get started automating your savings. Like many 20-somethings, I had a lot of concerns about automating my savings when I was first getting started. My biggest concern was, what if money automatically moves out of my checking account, but then I end up needing it? In retrospect, it’s easy to see why that was a silly concern, but when you’re thinking about making a big change, everything seems scary and you find any excuse you can to maintain the status quo. But no more, leave your excuses at the door and read on for a step-by-step guide to automating your savings.

1) Track your expenses for three months

Sign up for a program like Mint or Personal Capital (both free) and start tracking your expenses. I currently use Mint, but I understand Personal Capital does everything Mint does plus more. You can view all your expenses by category, so you see exactly where your money is going.

You should also pay attention to how much money you have left over at the end of the month, as this will serve as a baseline for future savings.

What you should learn:

  • Where your money is going
  • How much money you have left over each month

2) Set up an automatic transfer for an amount you can currently swing

If you saved $500 the first month, $100 the second, and $200 the third, err on the side of caution and set up an automatic transfer for $100. The goal is that the money left over after the automatic transfer should put a little pressure on you to keep spending down, but still leave some wiggle room in case their are unexpected expenses. (NOTE: If you didn’t have any money left over or if you spent more than you earned, don’t set up an automatic transfer yet, skip to the next step, and don’t set up an automatic transfer until you can save something three months in a row.)

Where should that automatic transfer go? That depends on your situation. If you don’t yet have a sufficient emergency fund, put it there. Your emergency fund should be with the same bank where you have your checking account. This addresses the concerns I had about automated savings. If you end up needing that money, you can transfer it back into your checking account, and I believe most, if not all, banks will make that money available immediately. If you’ve already saved up for emergencies, I recommend investing in a low cost index fund. I use Vanguard for my investments and have automatic transfers set up for the day after I get paid each month.

3) Set a budget and stick to it for three months

Looking back at your expenses for the past three months, identify areas where you could cut spending. I think at this point it’s too early to put a dollar amount on any category of spending, it would just be an arbitrary number. Instead, look for the categories that jump out at you and budget your lifestyle, not your money. For instance, if you notice that you went out to dinner twelve times per month, substitute one restaurant meal with a home cooked meal each week. If you see that you went to the mall every single week, reduce your shopping trips to once every other week (but don’t buy twice as much stuff!)

What you should learn:

  • That your life didn’t get any worse living on a budget
  • How much money you have left over each month on a budget
4) Increase your automatic transfer
After three months of living on a budget, you should start to see some extra money sitting in your checking account. Again, err on the side of caution and increase your automatic transfer by only the smallest amount you were able to save in one month.
5) Repeat steps 3 and 4 until you’re happy with your spending/saving balance or, if you’re a bad ass, until there’s nothing else you can cut from your budget.
Bonus Step: Every time you get a raise, increase your automatic transfer.

How I’m Living Paycheck to Paycheck (Sort Of)

If you’ve checked out my portfolio or my goals, you may be a bit confused by this title. Clearly I’m not living in credit card debt, struggling to make payments each month, and I would be able to continue paying my bills for a year if I lost my job tomorrow (without having to raid retirement accounts).

So how am I even sort of living paycheck to paycheck? Because I’ve earmarked roughly 40% of my take home pay for savings, and every month, the day after pay day, that money disappears from my checking account and is automatically transferred into various savings vehicles. Beyond that, I sheepishly admit that I took on a car payment this year after my old car was totaled, and vowed to myself that I would significantly over-pay each month to get rid of the loan as quickly as possible. So I’ve also earmarked about 13% of my take home pay for the car payment, and I refuse to shrink that payment unless there’s a dire emergency. Rent and bills run around 20% of my take home pay, leaving about 27% for food, clothing, fuel costs, entertainment, gifts, charity, cat food, and any additional savings I can manage. The result is that I sometimes feel like I’m living paycheck to paycheck.

With 73% of my take home pay set aside for rent, bills, car payments, and savings, I’m forced to really think about every day-to-day purchase I make. If I spend more than 27% on these discretionary expenses, I either have to borrow money from my emergency fund, or make a smaller car payment that month, neither of which would make me very happy.

It really hit home for me last month. As many women can likely commiserate, it’s frigging hard to find a pair of jeans that fits really well. I’d been going for years with a closet full of ill-fitting jeans that rarely got updated because I hate shopping for jeans so very much. Finally my fiance convinced me that we were going to spend as much time as we needed going to a few stores and trying on every pair of jeans that might look good, and we were going to completely re-fill my closet with jeans that actually fit. I was cranky and complainy for most of the day, but finally when we went to JC Penney we hit the mother lode. I found a whopping six pairs of jeans that looked great on me, so I bought all of them and donated every single pair of jeans that was previously in my closet to Goodwill. I knew that with my aggressive savings and car payment, buying six pairs of jeans would require sacrifice for the rest of the month, and I still might not quite make it in under budget. As the month dragged on, I wasn’t very good at saying “no” when my theatre friends wanted to go out for drinks after weekend performances, and those discretionary purchases kept adding up. By the end of the month, I realized I failed. I was $50 over budget. I had to borrow $50 from my emergency fund to pay my credit card bill.

Let that sink in for a second. I had to borrow $50 from my emergency fund to pay my credit card bill. That’s something someone living paycheck to paycheck says, not a financially savvy saver with her sights set on financial independence. By automatically transferring a large portion of my paycheck into savings, and not allowing myself to ever fall short on my rent, bills and car over-payment plan, I’ve created an artificial paycheck to paycheck mentality for myself. Though I didn’t intend this when I set up my automatic savings, the end result is that because I never see the money, I sometimes forget that I’m saving at all. So when I use up my entire discretionary budget, it feels like I haven’t saved anything. It feels like I spent more than I earned.

This is the magic of automated savings. You don’t see the money, so you forget you have it. You learn to live on less, and when you push the limits of that budget, you motivate yourself to save even more money. If you haven’t automated your savings yet, do it now!

Savings: One for All or All for One?

Ok, the title of this post only half works, but just deal with it.

I’ve been struggling with this whole car debacle for the past week and after several lengthy conversations with my boyfriend, I decided to get the repairs done on my old car instead of buying a new one. There are two primary reasons I came to this decision: 1) I can afford the repairs, I can’t afford to pay cash for another car; and 2) My boyfriend knows infinitely more about cars than I do and he’s confident that my car still has 2-3 years of life left in it.

I was talking about this with my brother and he suggested that I set up a separate savings account for a future car purchase. I’ve heard this advice many times, but I have a hard time putting it into practice. I recently set up my first targeted account, my house down payment fund, but when it comes to creating separate savings accounts for my emergency fund, a car fund, a travel fund, etc., I just haven’t been able to do it. I spent a long time trying to think of the cons against targeted savings, trying to convince myself that they’re great for long term goals such as a house, but not good for shorter term goals such as a car or travel. I couldn’t do it. I wrote out a list of pros and cons and came to realize that the cons were all just pros in disguise.

1) Knowing what you can afford

Pro side: Compartmentalizing your goals makes it easier to see what you can afford. If all of your savings are in one place and you need to buy a new car or you want to go on vacation, you need to think about what will be left in that account once you take out the money. You see that you have enough in your account to afford your short term goals, so you use the money on them. But now your long term goals are off track.

Con side: If your car completely breaks down, you need a new one, whether you have enough in your car fund or not. You’ll have to get the money from somewhere else, which means you’ll either have to borrow money, figure out a way to make some extra money quickly, or dip into one of your other savings accounts. Most likely is that you’ll have to dip into one of your other accounts, so why bother setting up targeted accounts in the first place?

Winner: Pro. True, you may have to raid one of your other savings accounts if you absolutely need a new car and don’t have enough in your car fund. But with targeted accounts, you can at least make an informed decision about where to take that money from. You can decide if your emergency fund is strong enough to borrow from, or if you would feel more secure delaying a future trip or the purchase of a house.

2) Knowing what to do with the money

Pro side: If you have a general time frame for when you’ll need the money, you can better decide how to invest that money. I know I won’t be able to afford a down payment on a house for several years, so I feel comfortable investing my savings in a balanced fund that carries a bit of risk. I’m now assuming that I will need to buy a new car in 2-3 years, so a CD may be a good option there. If I wanted to save for a trip to New York six months from now, a savings account would be the way to go. Separate accounts allow you to make the most out of your money. If I lumped it all into a savings account, I’d me missing out on potential returns.

Con side: Splitting up your money into different accounts makes it really hard to decide how much to put into each account. Some goals have a very specific time frame while others are more general, so you can’t use a formula to divvy up the money. If I start a car fund, I’ll have a fairly specific time frame of 2-3 years so I’ll know exactly how much I need to put away each month, but my down payment fund is a bit of a moving target. I’m not sure what housing prices are going to do in the next 5-10 years, and I’m not going to be able to save for this as fast as I’d like. The result is that contributions to my down payment fund are set at the highest amount I feel comfortable putting aside so I can continue to save for other goals.

Winner: Pro. The con side is really just me whining that saving money is hard. Yes, the down payment fund is a bit of a moving target and is currently set up as an “it’ll get there when it gets there” fund, but spending the time figuring out how much to contribute to each goal will help me better understand the time frame. Knowing that your goals will take longer than you hoped to achieve is better than not knowing how long they’ll take and being disappointed when you don’t have enough for those goals as quickly as you hoped.

After a whole lot of writing and re-writing, I’ve managed to convince myself that targeted savings are like a Nash Equilibrium. If I keep all my savings in one place, it’s really hard to balance all my goals so that I achieve the best possible overall outcome. I may achieve one goal very quickly, but it will be at the expense of another. Targeted savings accounts allow me to take all my other goals into consideration when formulating one specific goal, so I can plan out how to reach all of my goals in a time frame that works for me.