Category Archive: Savings

Make The Payment To Yourself

My wife and I have been saving up for a new-to-us automobile.

Instead of financing the purchase of a newer car, we have been making monthly payments to ourselves.

Each month I initiate a transfer from my local checking account to my online savings account.  (ING Direct makes these transfers super-simple to set up.)

The amount transferred is equal to the estimated cost of the vehicle, divided by the number of months until the purchase will be made.

This approach works for any major purchase – and helps to keep us out of consumer debt.

Obviously, we all know that we should save.  However, most folks never get to the point where they do save.  We look around and see all of the stuff that we want – and we borrow to get it.  We are then stuck with monthly payments and interest charges.

My own debt addiction left me miserable and broke.  I had a mailbox-full of bills and a life-full of stuff that I didn’t really need.

Thankfully, my eyes were opened.  I was able to see how dangerous my borrowing habits had become.  I broke the cycle – and I never want to go back to it.  Instead, I save for future purchases.  I focus on what I already own – and work hard to save for things that I actually want and need.

Today is not the day to bury our heads in the sand and ignore our financial situation.  Instead, today is the day to take charge – to look ourselves in the eye – and do something.

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Saving For A Car

I drive a 2001 Honda Accord.  It’s a great little car.  Right now, it has a little over 175,000 miles on it.  Sooner or later (let’s hope, later) I’m going to need to buy a newer automobile.  Here’s my process for saving for a car – or any other major purchase.

1.  Using the super-handy You Need a Budget software, I create a budget category labeled: Automobile Replacement.

2.  I estimate the number of months between now and my plan-to-purchase date.

3.  I then estimate the cost of the replacement vehicle.

4.  I divide the estimated cost by the estimated number of of months.  This tells me how much I need to save, each month, to reach my savings goal.

In effect, I’ve created a monthly “payment”.  Instead of paying the bank or the finance company – I’m paying myself.

I like to automate the process.  I use our Ing Direct Savings Account to set up an automatic monthly withdrawal – for the “payment” amount.  I deposit my paycheck in our local bank, the automatic withdrawal occurs a few days later, and I’m one month closer to reaching my goal.

Now, obviously, there are some things to consider:

First, it’s rather difficult to estimate the exact cost of a future purchase, especially a purchase that may be several months (or even years) down the road.  My system (rather imperfect, but something to work with) is to find the average price of the automobile I want, today, and then add 5% to that price, for each year that I’ll be saving.  If the car costs $10,000 today and I plan to purchase the “same” care in 3 years, my goal will be $11,500.  Again, this is a very rough estimate and doesn’t take in to account compounding, but it’s a number to work with.

Second, it’s also difficult to tell just how much my current car will be worth, when it’s time to sell it or trade it.  So, for me personally, I just leave it out of the equation.  Why?  I would rather over-save (is that a word?) than under-save.  Plus, even if I buy something newer, I might just keep my little car.  If I knew that the future price of my current car was going to be rather significant, I might consider that when creating my savings goal.  As it stands, I’ll just save for the newer car – and decide at the time of the future purchase, whether to sell the old car or not.

Third, I might need a newer car before I’ve reached my savings goal.  Again, it’s difficult to be in the prediction-game.  My Accord is running quite well and gets me, comfortably, from place to place.  Ten months from now, this might no longer be true.  The goal is to be prepared, as much as I can, given the facts that I currently have before me.  I cannot be (overly-) concerned about things that I cannot control.  I prepare for a certain reality and adjust as needed.

Fourth, I really don’t worry too much about the interest rate that I’m getting on my savings.  Right now (as you well know) – most rates are very low.  In the past, like when I started this blog, it was fun to get 4 to 6 percent rates – and I would use them when calculating how much I’d have in x number of months.  Now, I just focus on principal and consider any interest earned as a bonus.

By creating a monthly “payment” – to myself – I do two things.  One, I am assured that I will reach my savings goal.  Two, I keep myself from spending “extra” money on frivolous things.  One of the distinct dangers, oddly associated with being consumer-debt free, is the fact that, without monthly obligations to creditors, it is easy to be wasteful.  By creating a series of budget categories, under the heading of savings, an saving for specific things, every dollar has a name, every dollar has a purpose.

There is a side-benefit to saving for specific goals and specific purchases.  We have savings categories labeled – Appliance Replacement, Furniture Replacement, Automobile Replacement, etc.  Each category is funded, monthly.  Once a category has been “fully-funded” – the money that was going into that category, is directed into another category.  In effect, we are “snowballing” our savings goals – just like we did with our debt reduction.  That 36-months goal might become a 30-months goal, or even a 24-months goal, depending on how quickly we fully-fund other categories.

One last note – We didn’t have savings categories until we paid off our last consumer debt.  Instead, we used every penny (above our emergency fund) to pay off debt.  The interest rates charged by our creditors were higher than the rate we could achieve in savings, so it made sense, mathematically and emotionally, to get out of debt.

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Savings Goals Listed By Priority

One of my main goals is to live the rest of my life without having to borrow any more money. At present, my wife and I are consumer-debt free and we are working hard to pay off our mortgage.

In order to remain debt free, it is important that we think both short-term and long-term about our savings goals. I have created a list of our goals and ranked them by priority. I use the list to help guide us as we budget for monthly savings and plan annual retirement contributions.

Emergency Fund – We will always maintain enough cash reserves to pay for a minimum of six months’ worth of expenses.

403b Retirement – I will have regular contributions taken from my salary each month, increasing the amount of monthly contributions as salary rises and mortgage decreases.

Major Purchases Replacement Savings – If I plan to live without borrowing money, I need to prepare for and save for the future purchases of newer automobiles, furniture, carpet, etc. These savings will be kept in our online savings account and transferred to our checking, if needed. Right now, saving for a newer automobile is higher on our list than aggressively attacking mortgage debt.

Roth IRAs – With my 403b and my wife’s pension, more than ten percent of our gross income is going towards retirement. Once we own fifty percent of our home, we will again focus on funding our Roth IRAs. For now, we have stopped funding these accounts.

College Savings – We have three children and we are working hard to fund ESAs for each of them. Right now, our goal is to pay off the mortgage and then focus more attention on college savings. We are also comfortable knowing that some college expenses will simply become parts of our future monthly budgets, once our kids are actually in school.

Knowing when-to-save-for what can get tricky. For the next five years, basic retirement contributions, automobile replacement, and mortgage reduction will be some of our top priorities. Over time, I’m confident we’ll shift towards more retirement and college savings.

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How To Save Money For A Mid-Range Goal

I am not a fan of borrowing money, so it’s important that I plan for and save for mid-range goals.  I would define a mid-range goal as any major purchase or expense that I might have to make in the next 2 to 5 years.

Right now, we’re focusing on saving enough money to buy a newer automobile for me, some new furniture for our youngest child, and a sprinkler system for our lawn.

Obviously, some goals are more important than others.  An automobile is more necessary than a sprinkler system.  We try to create a list of reasonable goals, incorporate that list into our monthly budget, and save accordingly.

We only began to save for mid-range goals after we established an emergency fund.  The money in the emergency fund is for unforeseen expenses.

Here’s our current system, one we’ve used in the past to successfully save for major purchases –

1.  Using our monthly budget and my favorite budgeting tool, You Need A Budget, I create a budget category for each of our mid-range goals.

2.  I estimate the cost of each future goal, over-estimating by 10% to account for inflation.

3.  I calculate the number of months between the time I set the goal and the time I plan to make my purchase.

4.  I divide the cost by the number of months, and this tells me how much to allocate, each month, to that particular budget category.

Here’s an example.  If 36 months from now I want to buy a $12,600 automobile, I need to allocate $350 to that budget category, each month.

Now, I realize that this isn’t rocket-science.  The real issue isn’t figuring out how much I need to save – the real issue is actually saving the money.  Yes, it’s important that I plan for the future purchase.  Yes, it’s important that I budget for the future purchase.  But the most important thing that I can do, so that I can meet my ultimate goal of remaining debt-free, is to follow through, month-after-month, and stash that cash away.  Which brings me to –

5.  Each month, I make a “payment to myself” by depositing my allocations into my ING Direct Savings Account. I just make one deposit, for the total amount of all my mid-range goals.

I’m not overly concerned about the amount of interest my money is earning.  I know some folks who use a CD ladder or other savings vehicle to save for these types of purchases, but I prefer a simple online savings account.

Having these mid-range goals incorporated in our monthly budget really encourages self-discipline.  If it’s in the budget, it gets funded.  If it’s not, it gets forgotten.

Final Note:  I can – if necessary – use the money allocated for one goal to pay for another.  The money is, after all, mine.  The purpose of the various categories isn’t to box me it, but to keep me motivated.  In effect, I’ve created a debt – a debt that I owe myself.  Lucky for me, I don’t charge any interest!

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