The Stealth Way to Fund Your Desires!
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When I was a teenager, I opened a Certificate of Deposit (CD) at Chase Manhattan Bank. For opening a new account they gave me a basketball. There were a few other choices, a toaster I think. What young athlete would pass up a new basketball.
On the wall in the bank branch, there was a poster about Christmas Club Accounts.
I’m not sure if they exist these days, but people would probably call them Holiday Savings Accounts.
These types of programs are Great ways to save money and build wealth, no matter what people call them.
Like the old saying goes, “How do you eat an elephant? One bite at a time.”
According to Google, this phrase was coined by a wide range of people including possibly St. Francis of Assisi and Desmond Tutu.
Regardless, the point is that a big problem can seem daunting. But by breaking it down into manageable, bite-sized pieces, You can tackle any problem.
The same goes for saving money – whether saving for retirement, saving money for a down payment on a house or buying holiday gifts.
Let’s call this ‘Special Money’ since you’re earmarking the money for a specific purpose.
To benefit from this moneysaving technique, by way of example let’s dive into Christmas Club Accounts or Holiday Savings Accounts to help guide the way.
Even if Christmas Club Accounts and Holiday Club Accounts may not exist anymore, you can use this technique to save money in advance for your purchases.
These accounts are organized systems or programs to help us save money in smaller chunks in order to accumulate a larger sum of money to make a purchase.
Examples include:
Saving money for holiday gifts
Saving money for retirement
Buying a house – saving money for the down payment)
Buying a car
Saving money for a new wardrobe
Saving money for vacation (vacation money) or
Building an emergency fund.
Here’s how:
1. Define your savings goal.
How much money do you need to save – how much money do you have to accumulate to reach your spending goal?
For example, how much money do you plan to spend on Holiday Gifts this year?
How much money do you need to make the down payment on your new car?
How much money do you need to fund your vacation?
And so on. . .
2. Break down your goal – your savings goals – into manageable amounts: daily, weekly, monthly or quarterly savings amounts.
Suppose you want to accumulate $1,000 – save $1,000 – to buy your holiday gifts.
In order to reach your goal, how much money do you have to save between now and when you need the money – in this example, Christmas.
If New Year’s has just passed, divide your goal amount by the number of periods between now and when you will want to spend the money. That’s your deadline.
As we know, there are Twelve Months from January to December.
So you would divide your savings goal of $1,000 in this example by twelve months – [$1,000 divided by 12 months]. You would want to save $83.33 every month.
Or instead, you could save money every week. Then there would be approximately 50 weeks between January 1 and Christmas. I haircut 52 weeks by one or two weeks to give us a little cushion because Christmas falls out during the last week of the year.
If you plan to set aside money every week, you would divide $1,000 by 52 or 50. Then, every week you would save $19.23 [$1,000 divided by 52 weeks]; or $20.00 [$1,000 divided by 50 weeks].
To be on the safe side and help ensure that you achieve your goal by your deadline, you could round up the $83.33 in this example to $100.
Rounding up will help you get ahead of the curve and increase the likelihood you’ll save your entire desired amount of money and achieve your goal on or before the deadline. In case you happen to miss a month, you’ll have ‘money in the bank’.
3. Earmark this money as ‘special money’ – set aside for a specific goal or specific purpose!
By noting that this money that you accumulate – save – is for a particular purpose, I have found that you will be less likely to dip into your reserve and spend the money on purchases other than your stated goal – in this example Holiday Gifts.
By accumulating money Before making your purchases, you are can reduce or eliminate the need to borrow money, especially borrowing from credit cards. Which as we’ve discussed, the interest expense, interest cost is sky high.
4. Consider creating a separate account to store your Special Money. In other words, segregate your money.
Over time, I have also found that separating the Special Money from my checking account makes it a little bit harder for me to spend the money on purchases other than ‘Holiday Gifts’ or whatever else you are saving money for.
Sort of like ‘out of sight, out of mind’.
Open a separate savings account?
In part, the decision depends on whether your bank will charge you account fees.
Until last month, I maintained a savings account at my bank, Wells Fargo. My standing account balance was $505 because the required minimum balance to avoid bank account fees was $500 (and receive online statements vs. paper copies). I added a few extra dollars for good measure.
In the past, for example when I was going through the divorce, cash was tight. So I found it helpful to move money – store money – in an account that was separate from my checking account. That was also when interest rates were zero and Wells Fargo and other banks were paying zero (0%) on savings account balances.
Now with market interest rates higher, there are more attractive options, including American Express Online Savings Bank. Last I looked, Amex was paying an interest rate of 4.3% per year (per annum).
5. Minimize bank account fees.
Shop around to find the bank and account that meets your needs and charges no account fees or low account fees.
Some banks are actively seeking new customers and offering promotional interest rates or teaser interest rates which can be attractive.
If you can, you might look at a Credit Union, which often offers customers attractive account packages and interest rates.
BUT be sure to assess the financial strength of the bank or financial institution, Especially in light of the recent spate of bank failures (more on this below).
6. Make a ‘Book Entry’ instead?
Putting on my CPA hat for a moment, a ‘Book Entry’ is a notation in your financial books and records, for example your check register or checkbook, where you identify an amount of money for a particular purpose.
Accountants, chief financial officers and other financial types call this a ‘Reserve’.
In other words, you are setting aside money or reserving money to use in the future.
I have named this the ‘Book Entry Method’.
If you are a disciplined saver and you have to pay bank account fees to maintain a separate account or it’s a hassle, consider notionally setting aside money that’s part of your checking account balance.
For example, I keep a minimum of $3,000 in my checking account at all times. This helps me avoid checking account fees and provides a cash cushion of $2,500 in the event I need to pay some unexpected bills, costs and expenses.
So, if my total account balance is say $5,300 and I have set aside $3,000 (my reserve), then I can spend up to $2,300 [$5,000 minus $3,000] without dipping into my reserve.
You can use this same moneysaving technique with your Holiday Gifts Money or any other pot of money.
7. Set up automatic savings.
If you decide to use a separate bank account, so long as you expect to have adequate cash on hand, set up your bank account to automatically transfer your weekly or monthly savings amount into your Holiday Gift Account – your other savings account, your separate account.
That’s automatic savings! You save money automatically.
If you use the Book Entry Method, every period – day, week, month or quarter – increase your reserve or Book Entry.
If you bounce a money transfer, your bank is likely to charge you a Nasty Fee! I have read about fees of $30 to $35 – Ouch!
I am a disciplined saver so use the reserve concept explained above.
8. Collect some interest income while You wait!
Now that market savings account rates are more attractive (depending on when you’re reading this post), organize your savings to grab some interest income while you wait.
I opened an account with American Express Online Savings Bank.
I make online transfers between my checking account at Wells Fargo and my day-to-day savings account at American Express Online Savings Bank.
The account at American Express Online Savings Bank is FDIC (Federal Deposit Insurance Corporation) insured on balances up to $250,000 and you can withdraw your money at any time without penalty. . .
BUT be sure to study the current FDIC rules and the bank’s rules account features to see if an account like this is suitable for you.
NOTE: I am comfortable with American Express (Amex) and store some of my savings there. BUT, in the aftermath of recent bank failures – for example, Signature Bank; First Republic Bank; and New York Community Bank (NYCB); I am NOT recommending any banks, financial institutions or financial products. Be sure to conduct your own due diligence; consult your financial advisors; and make your own decisions.
Last I looked, Amex was paying an interest rate of 4.3% per year (per annum).
9. Beware of early withdrawal fees.
Make sure you can access the funds without penalty when you need them.
It sure would be irritating if Christmas Eve – Xmas Eve arrived and you had to pay an early withdrawal penalty to get your money in order to pay for your holiday gifts.
As far as I’m aware, Holiday Gift Accounts and Christmas Club accounts don’t charge penalties for early withdrawal, but be sure to read the fine print.
On the other hand, Certificates of Deposit (CDs) typically do charge early withdrawal fees.
If you open a Certificate of Deposit (CD), make sure you time the maturity of the Certificate of Deposit (CD) to match the date when you need the money.
Or, make sure there won’t be any early withdrawal fees if you withdraw the money before the Certificate of Deposit (CD) matures.
10. Monitor Your progress. Determine whether You are ahead of plan or behind plan.
Depending on how you design your savings plan, you should be able to track your progress against your goal.
For example, if you want to set aside or save $100 a month starting in January and it’s now the end of March, have you saved $300 ($100 per month multiplied by 3 months)?
If your total savings amount (account balance) is $400, you’re Ahead of Plan.
On the other hand, if your total savings amount (account balance) is only $250, you’re Behind Plan.
11. Adjust Your savings behavior and spending behavior so you’ll achieve Your goal, On Time!
The key to achieving your goals and objectives is to continuously monitor and track your progress against your specific goals and objectives.
While you’re at it, Modify your spending behavior, adjust your spending behavior, so you increase the likelihood you’ll achieve your goals – in this case having enough money on hand in December to buy your holiday gifts.
You can also avoid having to borrow money, avoid credit card debt and avoid incurring costly interest expense.
Whether you’re saving money for Holiday Gifts, a new car, a down payment on a house, an emergency fund, retirement or something else, this system works.
Like a charm!
It works for me!
It can work for You!
While you’re at it, to save more money, grab these easy steps to Save Money on Groceries. Click here.
Have a great week.
Arthur V.
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