Fixing your money mistakes: Save, save, save
The first step to fixing your finances is to create a budget. Once you know what you’re spending and whether your income can cover it, you’ll be better positioned to take the next step…
Saving for Emergencies and Retirement
While growing up, if I had a nickel for every time I heard my family tell me “money burns a hole in your pocket“, well, I still wouldn’t have any money because I spent it all!
My idea of saving when I was young, and even through college, was to not cash out the savings bonds my grandmama bought for me each birthday and Christmas. I lived paycheck to paycheck and still have trouble stashing away cash for rainy days.
However, I’ve been making major improvements in our finances. We’ve been contributing towards my wife’s 401k since she was eligible for a match, and I just signed up to contribute to my own employer’s 401k. However, I wish I began contributions a year ago even though my employer didn’t match then. Additionally, I haven’t been contributing to our Roth IRA limits since I opened it, but I justified it as “using the money to pay off debt”. I’m changing that line of thinking, but read on for more.
So how can you start saving more money?
Again, until you create a budget, you’ll have no idea how much you could be saving. Once you know how much you’re earning and spending, then you know how much you could be saving. Obviously, you need to pay your bills first, but you need to calculate the costs and benefits of paying down any extra debt you may have versus putting that money towards savings and investments.
Generally, if your debt interest rate is higher than your potential savings interest rate, then pay down the debt, but you need to consider the benefits of the different savings options available. For example, a definite return of 5% on a money market savings account is a different type of investment vehicle than an assumed return of 10% on a pre-tax Roth IRA. One can help you beat inflation while keeping your money liquid, while the other can help you stay alive through your golden years.
In our case, we didn’t know online savings accounts with high interest returns even existed until last year, and I didn’t have the discipline to save for retirement until recently. So for the last year, we’ve been paying down our low-interest debt fairly successfully, but still have a long way to go. But, now we need to decide how much to put towards savings versus our debt.
Automatic Saving
If you lack the discipline to save each month, then you have 2 options to have it done for you:
1. Ask your employer to separate your direct-deposit paycheck into your checking and savings accounts. You can either choose a percentage of your paycheck or a specific cash amount. You’ll need to resubmit your direct deposit paperwork to have the split done.
2. Set up an automated transfer from savings to checking. Our Bank of America checking and savings accounts are linked, so we can easily transfer between the two. However, BoA only offers a paltry 0.50% (or less) on their savings accounts, so we decided to fund one of our online savings accounts. I’ve found ING Direct and Emigrant Direct are pretty simple to add an account and set up scheduled transfers, and I’m actually looking into ING’s online-only Electric Orange checking account. However, we would still keep our brick-and-mortar checking account for quick ATM deposits.
You can also schedule automatic contributions to many investment accounts just as you would with an online savings account. We’ll be setting up an automated Roth IRA monthly contribution to our eTrade account as well. I don’t want to get trapped with a tax underpayment like I did last year!
Your own decision depends on your ability to force yourself to save rather than spend. For many of us, if the money is available, we’re much more prone to spend it. Take the money out of your account automatically when you get paid, and you don’t have the option or temptation to spend it.
Be sure to check out the rest of the series Fixing Your Money Mistakes:
- Create a Budge
- Save, Save, Save
- Be Sure to Insure
- Research, Wait, Repeat
- Don’t Fall for those Scams
I just signed up for ING’s Electric Orange checking, and it is exactly what I was looking for in online checking. I still a normal checking account at my local CU, which I will need to use in the rare cases that I need to write actual checks.
I would just be using HSBC high yield online savings, but by federal law savings accounts a limited to 6 non-ATM withdrawals per month. So I direct deposit my paychecks into my savings, and once a month I withdrawal however much I need into my Electric Orange checking. I can then transfer that money to pay off my credit card (I pay it off every month), pay bills, add to my brokerage account, fund my CU checking account, etc. All the while the money in my Electric Orange account is still making 4% interest.
Also, if adding yet another online banking account is going to add too much confusion to your finances, I suggest signing up for the free Yodlee MoneyCenter service (moneycenter.yodlee.com). That way you can see all of your account balances, and auto-login to any of the accounts.
I agree with you that automatic saving is important. I set up automatic transfers for both my daughter’s 401k and for our ROTH ira. If it was left up to me to remember to move the money every month, I’d surely forget.
It seems like the big hurdle to get over is just setting up the automatic transfers. Once that is done, letting the money flow in to the accounts each month is EASY!
Also note that if you are getting a company match in your 401k, it’s like getting an immediate 100% return. I would fund 401k then work on debt.
My problem is that I switched employers 3 times in 1 year before getting to my current employer. I was worried I wouldn’t stick around to vest in the employer match (which I was right for the last 2 companies), and I am only partly certain I’ll be sticking around this company another 2 years to vest.
Doh! I hate budgeting. Someone get me an accountant!
It can be complex reading about and customizing finances. But it’s also rewarding. Just a little research and clicking a few buttons on websites — and suddenly you have a bunch of more cash every year.
You’re so right about automating. If my savings weren’t taken out automatically, I bet they’d never move.