Hey guys, how’s it goin’?
Time for another Money Hack. Hope you got some use out of the last one. Today, I’m going to show you how to enforce discipline and put your money someplace safe (from you!)
I’ve shared the basic idea of how to start building your foundation. Spend less than you make. I’ve shared how using automation can help you get into the habit of methodically saving some money out of each paycheck. Of course, none of it matters if you can’t keep your hands off of your new savings.
When you first start saving, you will be sorely tempted to dip into your savings. You may need to pay a bill, you may need to buy a new pair of shoes, it could be any reason. When you’re first starting out, you are your own worst enemy when it comes to saving. So how do you avoid that?
Put up barriers to your money. In a previous post, I’ve discussed how you should make it difficult to get at your savings. Ideally, you should have to go to the bank to withdraw the money in person. There are other things you can do to make it even harder:
1. Use a bank that has a cooling off period. I’ve used ING Direct with great success in the past. They have better than average interest rates. But the most attractive thing about their service was a three day waiting period before I could get the money back out. If I wanted to touch that money, I really had to think about it. Was the reason I tried to withdraw really worth a three day wait?
2. CDs. Not the thing you get music on, but a Certificate of Deposit. This is a great way to keep your hands off your money. A CD is sort of like a bank note in reverse. You are making money available to the the bank for a fixed period of time. In exchange they pay out an interest rate much higher than a savings account. The thing that makes this superior when it comes to keeping your hands off your money is that if you try to take it back before it matures, you forfeit any interest you’ve earned PLUS you pay an early withdrawal penalty. For instance, I go to my bank and get a one year, $500 CD with a 6% annual interest rate. If I leave it alone for a year, the bank gives me back $530. But, if I ask for that money back before one year is up, I only get $450 back. How likely do you think you’ll be to take that money out if you know you’ll have to give up $50+?
3. Make your savings less liquid. This is for advanced savers who have learned how to avoid foolish investment. Take your savings and invest it. Obviously, when you try to take the money back out, you will need to spend time converting it back into cash. Then some more time waiting for the cash to make it back to your account. It’s even harder when your investment is not doing well. And it gets harder still when you think about all the money you won’t be making once you sell it off. This keeps your hands off on multiple levels. It’s really psychologically difficult to part with your investments. It also takes a lot of time and effort to get the money back into your hands. And if you invest wisely, you’ll have to consider losing whatever future gains you may have made by leaving it alone.
Those are three suggestions for enforcing saving and spending discipline. One of the key elements of saving money is to make it difficult to get your hands on your money. Hope it helps.
Until next time, keep on saving!
Saving money is an exercise in discipline. You make your plan and you stick to it. Unfortunately, building discipline is really hard work, just ask any military person about boot camp.
Like every other skill we pick up in life, savings discipline gets easier the more we do it. But you still have to get over that initial hump before you settle into the routine.
Fortunately, there are tricks you can use to flatten out the hills, so to speak. Automating your savings routine is one of them. In this post, I’ll share another one I picked up along the way.
Getting Ahead of Your Bills and Staying Ahead
Years ago, I had a hard time paying the bills every single month. The mind was willing, but the checkbook wasn’t able, so to speak. I tried every trick in the book to hold off the bills until my next paycheck. I post-dated checks, deliberately sent the electric bill to the gas company (don’t do that, it’s unethical. And it doesn’t work.) called and asked for extensions, you name it, I tried it. The only thing I never tried was saving for next months bills.
Ready for a trip to the bank? Good. For this Hack, you will need a THIRD bank account. Once you’ve got that new account set up:
Add up all of your monthly bills. Rent, car payments, utilities, credit card payments, anything you have to pay every month. For bills that change from month to month, like utilities, use a higher amount rather than a lower one.
Divide that total by the number of paychecks you receive in a month.
Set up an automatic transfer for that amount from your primary account to the bills account every payday.
If you haven’t already, set up an automatic payment plan with the companies you owe. Just about every company these days has some way you can pay them automatically. They really want to help you when it comes to getting you money on time. If they don’t have a bill pay option, you can usually set up automatic check writing through your bank. Just make sure the check will get there in time.
Set up another automatic transfer from your bills account back to your primary account one or two days ahead of when the bill will be paid.
It will take some time to build up your account to get ahead of your bills by a month, but can you imagine not having the worries of scrambling to make the bills every month? You won’t believe how much stress in your life just goes away when you don’t have to worry about the next bill. Heck, what if you don’t have to worry about bills for the next two or three months?
Obviously, if you want to accelerate the process, round up each bill by a few dollars.
Until next time, keep on saving.