Today’s Quick Tip – The Savings Sweep

At the end of each pay cycle, right before I receive a paycheck, I’ll do a savings sweep.  I take a peak at my monthly budget, notice any categories where I might have “left over” money, and sweep that money from my checking account into my savings account.

Benefits of Today’s Tip -

• Savings account pays higher interest rate than does checking account.
• Money in savings account is harder to spend than money in checking account.
• This gives me one more chance to analyze and tweak my budget.
• I am motivated to live under-budget, so that my sweep amount can be maximized!

Bonus Tip -

If you are in debt, consider a payment sweep.  Instead of sweeping “left over” money into savings, consider making an additional payment to one of your creditors.

I always keep a small amount in my checking account.  This would be especially important for those living without free checking.

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The Savings Sweep – Today’s Quick Tip

I have made a (temporary) change to the amount I contribute to my 403(b) retirement account.  After making a few major purchases, it’s time to rebuild our cash reserves.

Our income has been down, just a bit, as compared to this time last year – and expenses have been up.  We now have three kids, and our youngest is still in diapers.  As a family, we are trying to eat at home more often, and we are focusing on fresher, healthier (and therefore more expensive) foods.  I also used some of the money in our cash reserves to purchase some additional (and un-budgeted-for) disability insurance.  We also purchased a new computer – a MacBook that I love – and a new lawn mower – which I also love.  Adding it up, we’ve spent more this year than in previous years, and now it’s time to reign in the spending and rebuild our reserves.

One interesting thing that I noticed over the course of the last few months, is how strange it feels to buy things, even things we can afford.  In the past when I used a credit for most “major” purchases, I would focus on monthly payments, barely giving a thought to the real cost of each item.  Now, as I move through life paying cash, it “hurts” to spend money, because every dollar, every single dollar, comes straight out of our bank account, right up front.  Buying a $1500 computer requires – surprise, surprise – $1500.

The season-of-splurging (if buying a laptop, insurance, and a lawn mower can be considered splurging) has come to an end.  We are going to focus on rapidly rebuilding our cash reserves.  Here’s our quick-and-easy plan for piling up the cash.

1.  I will temporarily reduce contributions to my 403(b) account.  By temporarily, I’m thinking six months, or less.  Reducing my contributions will increase our taxable income, but we are willing to “take this hit” in order to rapidly build our cash cushion.

2.  I will automatically deposit a set amount, at the first of each month, into my online savings account.

3.  At the end of each month, any extra money that I might have earned from blogging or eBay sales will be deposited into the savings account.

4.  We will fine-tune our budget, cut out the fat, and go back to our more-frugal ways.

For the first half of 2009, I’ll freely admit, I’ve been a bit more “relaxed” than I could have been.  I needed these six months, to focus on my family, my commitments at work, and my health.  Now, however, it really is time to “get back into the game” and get serious again.  It felt good to spend a little money, and it will feel just as good to rebuild our savings.

Side-Note:  I consider “cash reserves” to be any money not allocated to retirement or education savings accounts, and above our standard six months’ of expenses “emergency fund”.  Also, even with the reduction in retirement account contributions, we will still be contributing more than 15% of our gross household income to retirement savings.

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Rebuilding Cash Reserves

I just logged in to my Orange Savings Account and noticed that my 2009 tax forms are now available for download.

From the ING Direct website:

You’ll receive a 1099 if you are…

The primary account holder of one or more deposit account(s) that earned in total $10 or more in interest in 2008. A deposit account is an Orange Savings Account, Orange CD or Electric Orange Checking. If you took a distribution from an IRA Savings or IRA CD in 2008, you’ll get a 1099-R.

You’ll receive a 1098 if you are…

The primary account holder of an Orange Mortgage or Orange Home Equity on which you paid interest during 2008.

I printed a copy of my 1099-INT and saved a copy to my hard drive.  I love the convenience of digital forms.

You can view your tax forms by logging into your account and clicking TAX FORMS.

I’m a big fan of ING Direct’s Orange Savings and Electric Orange accounts.  While there are other banks that offer slightly higher rates, I haven’t found one that could beat ING Direct’s customer service.  When away from the computer, I can call them, and within just a minute or two, a real-live-human will pick up the phone!  In this day and age, that attention to detail means a lot.

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ING Direct Tax Forms Now Available

Here’s how a normal CD ladder is setup -

You have a lump amount to invest in CDs.  Instead of buying one CD, for a specific maturity date, you spread your investment out, over several CDs, all with different maturity dates.  For instance, assume you had $10,000.  You could create a CD ladder which looked like this -

Now, that’s how a normal CD ladder would work. Take a lump sum, and buy several CDs that mature at different times. One of my fellow personal finance bloggers, Madison from My Dollar Plan, has written a very nice guide for how to build your own CD ladder.  I strongly suggest you read that article if you plan to create a CD ladder of your own.

Here’s how my modified CD ladder will work -

Instead of taking a lump sum and buying several CDs which would mature at different times, I’ve decided to buy a new CD, each month.  Each CD will mature 12 months after I buy it.  Here’s a chart, explaining the modified CD ladder -

As you can see, instead of buying different types of CDs (i.e. 6 Month, 12 Month, 18 Month, etc.) I’ve decided to stick with CDs which mature 12 months after they are purchased.  Instead of focusing on an initial lump sum, and breaking it down into several CDs, I’m focusing on smaller, monthly investments.

After 12 months, my first CD will mature.  At that time, I will decide if I want to withdraw my money from the CD, and put it it my savings account, or reinvest it in the CD.  A month after CD 1 matures, CD 2 will mature.

What I am trying to achieve, with my modified CD ladder, is balance – between higher interest rates and easy access to my money.  If I were to invest all of my emergency fund and non-retirement savings in CDs, all at once, I would immediately start to earn a higher interest rate, but I’d lose a certain measure of liquidity.  Plus, there are penalties for withdrawing money from a CD early.  On the flip side, if I leave all of my money in my savings account, I’m missing out on higher interest rates.  With the modified CD ladder, a portion of my savings will be very liquid (and earning a lower rate) while another portion will be in CDs (and earning a higher rate).

Why did I choose the 12 Month term?  Well, right now, my ING DIRECTsavings account has an interest rate of 2.75%, while a 12 Month CD has an interest rate of 4.00%.  (If at some point the savings rate is going up, or the CD rate is going down, I’ll change (or abandon) my modified CD ladder.)

As a side note, I realize that there are banks which offer higher CD rates, but I have been with ING Direct for several years, and their customer service and features are top notch. Plus, I can buy a CD with just a few clicks, automatically transferring money from my savings account to the new CD.

Finally, because this is a bit of an experiment, I really don’t want to commit any of my current savings to the modified CD ladder.  So, I’m going to push myself to earn $100 each month, via eBay.  I like setting up mini-goals like this one, just to keep my head in the game.  Each month, my regular, budgeted savings will continue to go into my savings account, and this additional savings, created from eBay sales, will be assigned to the modified CD ladder.

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Creating My Modified CD Ladder

I have some new $25 bonus referrals for those looking to open an online savings account with ING Direct.

Click one of the referrals below to open a new ING Direct Orange Savings Account.

Features of the account -

The Orange Savings Account

• No minimum balance required. Everyone earns the same high yield.  (As of July 31, 2008, the yield is 3.00% APY)
• 24-hour access to your account – you’re always ready for opportunities.
• FDIC-insured – your money is safe and secure.
• To receive your $25 bonus, your initial contribution must be at least $250.
• If you apply through one of the referral links below, I’ll receive $10.

Orange Savings Account Referral

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Once these referrals have been used, I’ll post more.  If you click on a link and the referral does not work, then it has been used by someone else.  No problem.  Simply contact me and I’ll send you your very own referral link, straight to your email.

If you would like to open an account, but you don’t have $250 for the initial deposit, you can click here to open an Electric Orange Checking Account or here to open an Orange Savings Account.  You will not receive a bonus, but you’ll still get the same great rates!

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ING Direct Savings Account $25 Referral Bonus

I’m a big fan of setting goals and creating plans – both short-term and long-term.  It’s important to me to clearly define my financial goals, because I’m trying to live my life without borrowing money.  Obviously, this means that I need cash – and quite a bit of it – in my savings account.

I only have one savings account, but the money in that account is allocated to very specific goals, according to my various short-term and long-term plans.

Here’s the current breakdown -

Emergency Fund -

I have enough money in my savings account to cover 12 months worth of household expenses.  I do not plan to use this money except for a major life emergency – think job loss, sickness of a child, or other unexpected life-event.  This money just sits in the account, as a preventative against life’s curve balls.  It is our (my wife’s and my) security-blanket.

Annual Expenses -

Certain bills are due once a year.  There is no need to keep the money that is budgeted for these expenses in my checking account, not earning any interest.  Instead, I divide the annual expense by 12 and transfer that amount, each month, from my checking account to my savings account.  Then, when the annual bill is due, I transfer the entire amount due from my savings account to my checking account and I make payment.  It is vitally important, when you are making your monthly budget, to include any annual or non-monthly bills.

• Automobile Insurance Premium
• Automobile Taxes
• Renter’s Insurance Premium
• Club Fees

Short-Term Savings Goals - (less than three years)

Lets assume that in the next three years I want to purchase a new washing machine, a new dryer, and a new sofa.  I can -

A.  Save for one goal (purchase) at a time.  For instance, if I want a new washing machine, I can allocate all of my short-term savings to the purchase of a washing machine.  In my budget, I’ll create a line-item labeled washing machine.  Suppose I have a total of $300 for short-term savings and the washing machine costs $900.  For three straight months, I will transfer $300 from my checking account to my savings account.  At the end of three months, I’ll transfer the entire $900 from my savings to my checking, and I’ll buy the washing machine.  Then I will begin to save for the dryer.  Once I buy the dryer, I’ll save for the sofa.

B.  Save for multiple goals (purchases) at a time.  Let’s assume that the washing machine will cost $900, the dryer $900, and the sofa $900.  I will create three line-items, one labeled washing machine, one dryer, and one sofa.  I’ll then transfer $300 from my checking to my savings, but in my budget, $100 will be allocated to the washing machine, $100 to the dryer, and $100 to the sofa.  In nine months, I’ll have enough to buy all three items.

It really doesn’t matter which way I do it.  It all really depends on how many budget categories I want to keep up with and how detailed I want my plan to be.  Obviously, plan B can change to plan A at any time, and vice-versa.  If I’m following plan A, and I’ve saved up enough to buy the washing machine, I might change my mind, and wait another three months, so I can buy the washing machine and dryer as a pair.  Or, I might find a deal on the sofa, and buy it first.  The idea here isn’t to bog myself down in the minutiae of a thousand different budget categories.  The real goal is to think beyond today.  If I know that I’m going to need, at some point in the not-so-distant-future, a new washing machine, I need to start saving today.  If I don’t, I won’t be ready to pay cash when my old washing machine dies.

• New Furniture
• New Appliances
• Newer Automobile
• Dream Vacation

Long-Term Savings – (three to seven years)

I am trying to save enough money to pay cash for a house.  This is a big goal, and I want to accomplish it in a relatively short amount of time.  If I were to focus my savings, exclusively, on this particular goal, I wouldn’t have enough money to cover some of my smaller, short-term goals.  So, I save for my long-term goal just like I did for my short-term goal, but with a twist.  Every extra dollar of income, above and beyond what it takes to meet my other savings goals, is allocated to long-term savings.  This includes income from my business, income from eBay sales, gifts from family members, etc.

In my budget, there is a line-item labeled new house, and a portion of my regular paycheck is transferred from my checking account to my savings account, each month, and is allocated for my future home purchase.  In addition to those regular transfers, any additional income that I might receive is immediately transferred into my savings account and is allocated for a future home purchase.

Various -

From time to time, I’ll also use my savings account to store Roth IRA or ESA contributions, before I transfer those contributions to my Roth, my wife’s Roth, or my kids’ ESAs.  I’ll probably stop doing this, once I move away from annual contributions and towards monthly contributions.

I’ve been very happy with ING Direct and their Orange Savings Account.  If you want, you can actually open sub-accounts, link them to your primary account, and keep your money separate that way.  I don’t do this, but I know many who do.

Keep in mind, many savings account limit the number of withdrawals you can make each month (or quarter).

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Savings Account Allocation Breakdown

One of my goals for 2008 is to rebuild my non-retirement savings. In 2007, we purchased a new-to-us minivan and in early 2008, we had a new baby (and purchased several baby-related items). These expenses worked together to dramatically reduce our non-retirement savings and I’ve been working diligently to rebuild them.

I just made a transfer from my primary checking account to my ING DIRECT Savings Account. My current balance now rests at $5,000. My goal for 2008 is $16,000. Bright readers who can quickly do math in their heads will have already calculated that $16,000 divided by 12 months is $1,333.33. So, after 5 months, I’m a little behind. O.K. I’m a lot behind. In fact, I’m $1,666.6 behind. But, alas, I have a plan!

In just a few weeks, I should receive my economic stimulus rebate check. The amount on the check will read $1,800. I’ll deposit the check and – abracadabra – I’ll be right back on track.

Click here to see my current savings chart over at the No Credit Needed Network – NCNSavings2008.

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Updating My Non-Retirement Savings Chart

Here’s how I manage to fully-fund my 403(b) retirement account, my Roth IRA, save for my kids’ college, and maintain a healthy emergency fund.

I pay myself first -

Before I receive my monthly paycheck, a portion is withheld, equal to 1/12 of my annual 403(b) contribution.

As soon as I receive my paycheck, I deposit it in my checking account. I then schedule several transfers. First, I transfer a fixed amount to my non-retirement savings account. Second, I transfer an amount to either my Roth IRA or my wife’s Roth IRA, depending on which account I’m working to fund in a particular span of months. Currently, I am working to fully-fund my wife’s Roth IRA.

I pay myself last -

At the end of each month, I take any amount remaining in my checking account (above a $100 cushion) and transfer it to my savings account. From my saving account, I transfer funds to either my daughter’s Education Savings Account or my son’s Education Savings Account, depending on which account I’m working to fund in a particular span of months. Currently, I’m working to fully-fund my daughter’s ESA.

I pay myself along the way -

When I sit down to create my monthly budget, I use only the income from my regular job. Any other income that I might receive, whether it be from blogging or writing or selling things on eBay, is deposited into my business checking account. The vast majority is then transferred to my non-retirement savings. A small amount remains in my business checking and is used to cover the cost of doing business.

At the end of the fiscal year, I make a contribution, from my non-retirement savings, to my SEP-IRA (a type of retirement account for people who have self employment income). The amount of this contribution will vary, depending on how much additional income I generate from blogging and writing.

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I Pay Myself First – And Last – And All Along The Way

As many of you know, not only do I blog here at No Credit Needed, I also manage the No Credit Needed Network. Over at the Network, members can create a personal finance goal and track their progress. Those members who have websites can post their progress charts on their websites.

Recently, NCN Network member DebtFree-Revolution paid off all non-mortgage debt. I asked DFR to write a guest post, hoping that it would inspire others to join the network and track their progress.

NCN has asked if I’d be interested in writing a guest post about becoming debt free and achieving my goal, as an inspiration to everyone else still struggling with the debt monster. Absolutely!!!

I am hollering back to everyone still climbing the mountain – “DO IT!!! It is SOOO worth it!!!”

It took me fourteen months to achieve my goal. Fourteen months of refusing to give in, refusing to quit refusing to give up the dream.

I’ve been called stubborn at times – and I even went out and got the proverbial extra weekend job delivering pizzas to get it done as fast as I could. I wanted OUT of debt!

At the beginning of my journey, it was slow going and it seemed like I wasn’t making progress. Then I found the NCN Network, and made my chart. Here was what I needed: a graphical visual representation of my actual progress. The pie slice expanded …sometimes so small I had to look at the percentage number to be sure it really was moving, but it still moved. Then it picked up speed as the number of payments shrank and the amount being paid off per month began to grow.

Then it happened – The Big Day when I became officially debt free (except for the house)!

You can do it too. Get mad! Get determined! Get out of debt!

I want to thank DFR for this inspiring post. If you are in debt (or looking for great articles about staying debt free), I encourage you to visit DebtFree-Revolution!

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Guest Post: DebtFree-Revolution And The NCN Network

One of my goals for 2008 is to rebuild my non-retirement savings.

As of February 18, the balance in my non-retirement savings is $4,500.

My goal for 2008 is $16,000.  With the new baby on the way, I feel that it is important to have some extra cash ‘on hand’.  With that in mind, I will rebuild my non-retirement savings, and then I will focus on funding my wife’s Roth IRA for 2008.

Click here to view my No Credit Needed Network Chart – NCNSavings2008.

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Rebuilding My Non-Retirement Savings (Mid-February Update)