Handling Finances

I’ve written previously about my goals for 2008, but in reality I have many more goals than simply saving for retirement, buying a house, and traveling to England. In the past, I would simply use a spreadsheet to allocate the money in my savings account to different goals, but I found that rather tedious and would frequently just work on one goal at a time and ignore the rest. Having grown up with the internet and computers at my fingertips I’ve come to expect things to be automated and about a month ago, I found a great way to automate my goal-oriented saving.

Once you’ve entered all your information and started an account at ING, it’s extremely simple to create additional separate accounts for various purposes. You just pick which type of account (checking or savings — I only use savings) and give the account a name. I’ve started four accounts besides my main account for some basic discretionary spending in my life: Photography, Vacation, Auto and Charitable Giving. I also set up automatic transfers to each right after my monthly paycheck is deposited — I always keep enough to cover these automatic deposits in my main checking account so I’m not in danger of emptying my account and incurring fees.

Why save for smaller goals?

There’s another way to do this — I could pull money from my checking account when I want to give to charity or buy a new camera lens, and I could use my emergency fund for car problems. But car problems are predictable — you don’t know when they’ll come up, but you know that you’ll encounter them eventually! Putting money aside every month reduces and even eliminates the financial stress of car problems, and can spread out the cost of a new car into a high-interest savings account.

Aside from the auto savings, all my accounts are totally discretionary. These accounts serve two purposes: they limit my spending on photography and vacations, and they ensure that I will have money to spend in these areas when I want it.  Also, while my wife balks (with good reason!) at spending hundreds of dollars on camera equipment, saving for months to get a new lens both helps me to avoid impulsive purchases and calms her reaction to the cost of lenses “we don’t need.”  Avoiding marital strife and impulsive expenses all at once is a huge bonus in my book!

Saving for Goals Sets Priorities

Not only does this system reduce marital strife, eliminate impulsive purchases and avoid debt, but it makes your priorities obvious every month.  With automatic or manual monthly transfers to the savings accounts, you can assign priorities based on how much money you put into each account.  If I’m saving up for an overseas vacation, I might increase my vacation savings.  At the same time, I can either reduce my contribution to another account or simply live with less spending money for the month.  if I get some extra money (like the coming stimulus check) I can put part of that toward whatever goal I want as well as throwing some into long-term savings.  By increasing my photography account, I’ll be stimulating the economy… just perhaps not until I can afford that $7000 Canon 600mm F4L lens I’ve been drooling over!  (note to the wife: just kidding!)

Smartypig — the online version of my savings plan.

Smartypig.com has a really similar way to save for small goals. If you want to save up for your next vacation or a new car, you can put your money in an account with regular deposits. The site will tell you if you’re on track — factoring in your automated deposits and the interest rate. Unfortunately, although the site has a slightly higher interest rate than ING and other high-interest savings accounts, it charges hefty fees for everything from having gifts deposited by relatives (5%!) to getting back your money by check. Of course they don’t let you direct-deposit your money back into the account it came from because they want the 2% interchange fees they get from the debit card they want you to use. Overall it’s a bit of a racket and I strongly suggest perusing The Finance Buff’s review of the site at Free Money Finance before giving them a dime!

Whether you go with ING accounts, Smartypig, or just keep track of your categories on a spreadsheet, consider prioritizing your money with goal-oriented savings.  It’ll help your finances, teach you patience, and earn interest while you wait!

This entry was posted on Monday, March 31st, 2008 at 4:48 pm and is filed under Personal, Saving, Spending. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.