Saturday, August 23, 2008

The Silly Savings Game I Play

I play silly "games" to ensure that I save something every month to put towards my emergency fund. The games often don’t make sense and are inefficient, but somehow, it’s been working for me.

1. "Earmarks" Are Not "Assets"
As you can see from my net worth chart, my "cash" position is listed as $2,955.73 (as of 7/31/08). This is not the total balance in my savings, though.

I currently have 5 savings accounts at 5 different banks. The balances (as of 7/31/08) are:
Credit Union: $111.78
Wells Fargo: $303.14
Bank of America: $359.39
ING Online: $3,152.05
Citibank Online: $2,019.09
TOTAL: $5,945.45

The reason why I haven’t used $5,945.45 to calculate my net worth is because $2,930.23 of it is earmarked for future spending. Some of the earmarks are for fun stuff like vacation, Christmas and "miscellaneous" spending. Other earmarks are for irregular expenses like car-maintenance/repairs, pet care, etc.

If the money is earmarked for spending, it’s really not savings, is it? That’s why in my balance sheet, I only use my un-earmarked savings as my "cash" position. I’d rather see my true savings balance rather than a yo-yo balance on my net worth balance sheet every month.

2. Earmarks Don’t Accrue Interest
Most of my earmarks are saved in my ING account because it pays the highest interest (currently 3% APY). Although the ING account allows me to create sub-accounts for my earmarks, I haven’t used this feature. I’d rather manually keep track of the interest accrued every month on my spreadsheet. This is because I want my interest to accrue only to my true savings, not my earmarks.

For example, I have $895 earmarked for the purchase of a new laptop. The laptop earmark accrues approximately $2 in interest every month, but I apply it to my emergency fund, not to my "laptop fund". My "laptop fund" will have $895 in perpetuity until I spend it.

3. I Keep Multiple Savings Account
I keep multiple savings accounts because the FDIC only insures up to $100,000. Since I intend to save more than $500,000, I’ve decided I need multiple accounts.

That's a joke. The real reason why I keep some of my money in low interest bearing accounts (i.e., Bank of America, Wells Fargo) is for accessibility. As much as I love my ING account, it takes about 3 business days before money can be transferred to and from my ING account. (This is another good reason why I park my earmarks in my ING account. It gives me a "cooling off" period when I see something I want to buy.)

But this lag time in transferring money may pose a serious inconvenience in a true emergency. I figure if I maintain the minimum balance in the BofA and WF accounts, I’m really not losing much interest on that money.

The Citibank Ultimate Savings Account has a slightly lower APY (currently 2.75%) than ING, but again, I keep a chunk of my money there for accessibility.

4. I Live One Pay-Raise Behind
This year, I got a nice 5% raise. (In this economy, 5% is GREAT!) After I bumped up my 401k contribution from 13% to 15% of my pre-tax income, my payraise netted me $34 extra per paycheck. I know it's small, but I put the $34/paycheck raise into my emergency fund, rather than increasing my discretionary spending for this year. Next year (assuming I don't get laid off), I'll increase my standard of living by $34/paycheck and bank next year's raise (if any).

5. Automatic Deposit, Transfer, Re-Transfer and Inter-Bank Transfer
This is the crazy and inefficient part of my monthly savings plan. Every paycheck, I have $15 deposited to my Bank of America checking account. On the 15th of every month, BofA transfers $25 from my checking account to my savings account.

Here’s the inefficient part: I then re-transfer the $25 back to my checking and then transfer it to my ING emergency fund account.

I know I should just cancel the automatic transfer between my BofA accounts and just set up an automatic deposit into my ING account every month. I haven’t done so because I haven’t figured out how to cancel the automatic transfer feature on BofA’s website. I’m also too lazy to go a branch or to call a teller. (I’m also too lazy to instruct my employer to adjust my automatic deposit.)

After all of this transfer madness, there’s $5 “left behind” in my BofA checking account every month. (There’s $20 left behind on 3 paycheck months.) I’ve let this excess sit in my non-interest bearing checking account to create a “spending cushion”.

Stupid? Yes. Inefficient? Yes. But the point is, if you have an automatic transfer from your checking to your savings every month, you're guaranteed to save something. In my defense, this scheme guarantees that I will save at least $25 for emergencies and still have some “fun money” left over every month.

6. Round-Up for Payments and Round-Down for Income
This doesn't necessarily count as "savings" but when I balance my checkbook, I always round-down my paychecks and round-up my payments.

For example, if my paycheck is $1,500.59, I enter "+$1,500". But If I make a payment for $100.08, I always calculate "-$101".

The pennies and cents add up pretty quickly. My best friend claims this method allowed her to save up approx. $10,000 over several years. I admit I haven't seen that great of a success but it's definitely given me a comfortable spending cushion of $120 that I can tap in an emergency.


Anonymous said...

When I calc my net worth (so depressing these days with the market losses!), I do it two ways, once WITH all assets (classic net worth) and once with only "spendable assets" - which leaves out the house equity to date, the escrow (your earmark) accounts and things like the cash value of my life insurance policies. The second one is the one I track

Good way to think about your funds. - the escrow/earmark funds are really already committed ie they are actually spent. You just haven't disbursed the funds yet.

MoneyBeagle said...

Great post! I do the same thing in roughly the same way. I have a high yield savings account that I track in a MS Excel spreadsheet. I have it broken down into categories and depending on the category, some of the money is not considered toward my net worth, as it is already considered 'spent'. I'm glad to know that I'm not the only one that has employed this variation of net worth calculation.

Shtinkykat said...

Thanks for visiting. I am with you there on how depressing it is to look at your net worth going down each time the market tanks. :-( I thought I was being obsesive compulsive with my Excel spreadsheet but I'm glad there are others out there who do the same.
I'll check out moneybeagle's blog today!

Shadox said...

Funny arrangement with all the transfer of funds....

Regarding your earmarks not being calculated in your networth - that's probably the right way to look at this. It's like a balance sheet - you have an asset recorded, but you have what you consider to be off-setting liabilities or accruals. That's a good strategy.

VC said...

That last point is actually a really good idea. Thanks for the tip!