A blog about spending wisely in your twenties, with advice on everything from cooking to saving money on gas; how to teach yourself to save money instead of spending it, traveling without breaking the bank, and much more.

Monday, July 14, 2008

My Three Savings Accounts, or How I Keep My Grubby Paws Off of My Money

When I started actively saving again after years of blowing my hard earned money on I-don't -know-what, I enrolled in the Keep the Change program at my bank (purchases are rounded up to the nearest dollar and the difference is transferred from my checking into my savings) - they matched the transfers 100% for the first three months and 5% thereafter. So far I've saved $102.31 this way, and I'll be receiving (so far) $42.30 when my matching funds are distributed to me in January. If your bank offers a similar program, I can't recommend it enough.

I generally keep a fairly low balance in this account, treating it as a safety net for any accounting errors I might make, causing my balance to be a little more or less than I'm counting on. I also use it for small, unexpected expenses if I don't have room in my budget for them. For example, when the price of gasoline jumped through the roof, I used this account as a buffer until I'd adjusted my spending to account for the higher cost. This is the most liquid of my savings accounts because transfers into my checking are instantly available. Once a month I transfer $25 over, which generally covers anything I may have needed 'borrow' from myself. The balance is kept fairly low (about $100) because the interest rate sucks. When the balance is over $100, the difference is transferred into my second savings account.

My second savings account is with an online bank with a far, far better interest rate than my brick & mortar bank. This account scrapes $25 off my checking account every payday, and I often will transfer small amounts of idle cash into this account. I use it to save for upcoming major expenses, in the $200 to $500 range. These generally are not emergency expenses but they're not exactly extravagant either. The last big ticket item I used this account to save for was a plane ticket to visit my family on the east coast, an expense that I would deem a necessary luxury. I continually add to this account whether I'm actively saving for anything or not. This account is slightly less liquid than the first one, it takes a few days to transfer money back into my checking. I also receive a referral bonus if I refer a friend who funds an account with $250 or more, I receive $10 and they receive $25. So far, I've earned $30 this way. (If you're interested, email me). When the balance gets to be more than $500 or so and I'm not actively saving for anything, the difference is transferred to my third savings account.

My third savings account is actually a money market account, held at a major online trading firm. This is my Big Savings Account, the balance is kept much higher than in the others and I never pull anything out of it. Partially because I opened it as part of a promotion - if I make an electronic transfer of at least $50 a month for a year, I'll receive $100. So yeah, I leave it alone. I transfer the $50 a month, sometimes more if I can afford it. My money market account will eventually be where I keep my emergency fund, though right now a lot of it is earmarked for my wedding.

If you've been keeping track, you'll have noticed that I have received or will receive a total of $172.30 simply by being an active saver. That figure doesn't even include interest.

So if you're not saving anything, I highly recommend a tiered approach:

(1) Open a simple brick & mortar savings account, linked to your checking. If your bank offers a program like Keep the Change, take advantage of it. If not, simply do it yourself. Once you get comfortable with the idea that, yes, you CAN leave that money alone, set up an automatic transfer, something small - even as little as $5 a month if that's what you can afford.

(2) Once you've gotten used to the idea of Leaving Your Money Alone (managing to get that first account up to $100 should just about do it) start transferring any amount over $100 in your first account into a less liquid, higher interest account. Set up a transfer that will scrape a little bit off of every paycheck, and again - start small if you have to.

(3) The time between steps two and three is significantly longer than between one and two, but once you've got $500 or so in a fairly liquid, high interest account, start funding an account that's harder to withdraw on. Anything over $500 in account #2, transfer to account #3. Try to fund it regularly, about once a month. I treat my $50 transfer just as I would any other bill, it's basically an invoice from Future Me.

As you open each account, shop around and try to find some sort of promotion, especially one that will earn you money if you leave your money alone.

Right now I'm sitting on $628.76, which comes out to about $104 a month since I started these accounts up from ZERO in late January / early February. It still might not seem like a lot until you remember that I flip burgers for a living. And I live in beautiful, oh-god-the-cost-of-living-is-so-high-here, Orange County, California. If I can find $100 a month, pretty much any single twenty-something year old with a steady job and low overhead can too.