One of the nice features of ING Direct savings accounts (dont have one? read this first) is that its really easy to create multiple accounts under your customer number. Once you login, just click open account and go through a couple of steps (basically give it a name, tell them how much to open it with, and where the funds need to come from). Everything is setup right then and you can download all of your transactions (to Quicken/Money/Excel) for all accounts at once.
Here is one way that seems to work quite well and is simple to do if you have 30 minutes or so to thing through things.
Step 1
You started by thinking of all of the high level categories you know youll spend money on, but they either required more money than you would have any given month (so you need to save up – like deductible payments), happened infrequently but the amounts varied when it did happen (gifts, car maintenance, etc.), or its an area that you would like to start stashing away a little money each month just for fun (vacation).
Step 2
For each of those categories, you need to decide whether you need to keep the account at a certain level (e.g. maintain $2000 at any given time) or whether you would put in money each month and let it keep growing. If you decided it was an account that would keep growing, you then had to go back and decide how much money to transfer and how frequently to do it. For some accounts, this may be based on a goal (e.g. You know you need $300 a year for basic car maintenance – so you have to put in $25 at a minimum per month).
Step 3
Setup your automated transfers. If youve read The Automatic Millionaire, youve seen examples of how important putting things like this on autopilot can be. You can certainly transfer the money manually, but its going to be even easier to put the money away at a certain time of the month (such as right after a paycheck direct deposit). If you dont set it up automatically, at least put a reminder on your calendar so youll remember to do it when the time comes.
And thats it! If you have an account that you need to keep at a certain level, then go ahead and transfer what you can into it and then build it up to that level from here. Youll probably have more accounts than you can fill in a month or so – that means youll just need to prioritize where the money goes at the start. Once you get things started, you can shift the flow into different accounts until youre just filling the variable accounts each month.
If youve thought through your accounts and set things up, then its smooth sailing from here. The way you make this work for you is this:
Keep a bit of cash in your bank account ($2000 is probably a safe amount – this will depend on how much you spendif youre an undergrad, you probably cant keep that much and thats fine – youre expenses are limitedso adapt it to your situation). When an expense comes up, just start a transfer from your savings account (pick the one that matches the expense) to your bank account. Itll take a few days (~3 days usually) to show up – so if you have to pay for anything right then, youll us the cash in the bank account and just reimburse yourself out of the savings account that matches the expense. If its a large expense, put it on your credit card, BUT take the money out of savings to pay off your card at the end of the month so you dont pay any finance charges. (If you dont want to carry a credit card, thats fine – but this strategy isnt going to be that safe if you dont have a backup means to pay for expenses beyond your bank cash)
This is the strategy Ive been using for a little bit and it seems to work quite nice. I still track every transaction in Quicken so I can get details of where Im spending my money if I want (generally I use it for budgeting purposes), but you dont have to be that detailed – your savings account balance tells you the most you can spend on that categoryif you use up the savings amount, then youll need to refill it before you spend again. Its basically envelope budgeting without the envelope. To give you a better idea of how this might work, Ill give you a quick rundown of the accounts I setup for my situation:
Car Maintenance
(covers oil changes, tune-ups, any little upgrades/repairs)
Im going to put in $25-$50 a month on a continual basis – if thats not enough, Ill up the amount.
Deductibles
(covers any deductible I might have to pay for a given calendar year – medical/dental/home etc.)
This account is set at $3500 which is the total of all deductibles + any probable costs relating to insurance – in my case, Im adding in the amount up to my out of pocket max for health insurance because of how I have my insurance setup. Once its reached $3500, Ill stop putting money in it until I use it – then Ill refill back to $3500.)
Emergency
(covers any larger situation where money might become an issue – out of work, unexpected home repair, etc.)
Its generally recommended that you save up 3-6 months worth of cash to give you plenty of cushion should something go wrong. My goal is to have 3 months worth saved by the end of the year and bump that up to 6+ months worth of expenses during 2007.)
Gifts
(covers gifts to family, friends, etc – easier to put a little away and then use this to fund gifts so it doesnt impact your regular monthly cash flow)
Im planning on having $25+ or so a month go here – I dont usually give out tons of gifts, but by Christmas time, this account will have plenty to do everything that needs to be done in addition to birthdays etc. during the year.)
Home Improvement
(covers any planned or minor unplanned home improvement work that needs to be done)
In my case, I know Id like to fix up the kitchen, garage, and master bath so Im trying to put as much money here as I can each month – but these arent urgent issues, so its basically whatever I can comfortably put away here each month until I nail down exact figures for the upgrades.
Toys Fun
(covers what it sounds like – a new laptop, an iPod, etc.)
Im planning on $25-$100 here each month – starting at the low end and ramping up when I can. This isnt an urgent category either, but its important that I start putting a little money away so I can by some of the things I want without having to wait a year. Any extra cash I have left over that doesnt go into the home improvement account will probably find its way in here.
Vacation
(covers vacations of course)
This one is going to get around $50 per month. Thats not much, but Im not planning on any major vacation this year – so by the time next year rolls around, Ill have enough saved up to take a small vacation and Ill be able to up my monthly amount so I can work on taking better vacations in the future.
Thats about it – not a ton of accounts. Things like food, utilities, etc. all come out of my monthly cash flow and never leave my bank account since I can predict when and how much they will be.