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When I first moved out of my parent's house and started to pay my rent and bills, I realized I needed to find a better way to manage my money. And I strictly mean on like a day-to-day basis, not my investments. I just needed a way to prevent myself from overspending before I had to pay for my rent every month and the other stuff I was getting billed on my credit cards for.
Before, everything was going into my checking account. While it was great and all, I wasn't receiving a physical check. I was getting paid right away through my direct deposit I set up. It was so easy to think I had way more money than I did. You can see where this is going. It didn't help temper my spending at all.
When I was home, I wasn't concerned at all about this, because I was fortunate enough to not have to pay rent, and my credit card bills were minimal if anything. The only thing I had to make sure was paid monthly was the tiny bit of credit card payments I had. I only used them then to make sure I was building credit. Other than that, it doesn't really count. The only thing I was really taking care of was automating my 401k. Once I maxed that out, I made sure I contributed to my Roth IRA and maxed that out too.
But when I moved out, I really didn't have a good gauge or frame of reference on how much I should save for each paycheck. I also had to figure out how to prevent myself from burning out in the process and remember to enjoy life every so often when the 9-5 (really 7-7) grind was over. I had to start paying for all the rent since my girlfriend is focusing on paying her loans off. She's also in charge of the grocery, internet and utilities bill so that's a huge help for me. But I wanted to take the brunt of the bill so she could obviously pay off the loans as soon as possible.
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So what did I do? I created a separate account for my monthly payments. And it doesn't need to be anything crazy fancy or an entirely separate bank account. I simply opened a savings account on top of already having my checking account. I used to have one in the past, but when I was living at home, it didn't really make sense for me. I hardly had any use for it and I needed to have a minimum of $300 in the savings account. I could definitely put that $300 to better use, so I got rid of it. Now, I definitely get much more use from it.
How it Helped:
The savings account helped me to stop thinking I had more money than I actually did for spending. It also made me resist the urge to withdraw from my savings if I wanted to spend a little extra, because of the extra step you need to take in transferring the money from the savings to checking. It made me stop and catch myself that what I was doing was wrong. It made me more disciplined and created a good habit for me.
Personally, this has made a huge impact on my spending, because sometimes I can literally go a whole two weeks without paying for anything if my girlfriend and I aren't doing anything those weekends and just chill at home and binge watch whatever new show is left on Netflix to watch. And since my girlfriend gets the groceries and I bring my own lunch to work, I don't have to pay for a lunch in the city that could cost up to literally 4x as much.
Other than caving in and buying a six-pack of beer or 18 bottles of wine from the latest sale on Groupon or Wall Street Journal Wines or whatever, I rarely ever spend money during the week. And those 18 bottles last a long time, it's an awesome deal I highly recommend keeping an eye out for them.
So yea anyways, having a separate account for monthly payments has been huge for me. It can definitely do you a lot of good if you haven't started already. It's been a huge help in keeping me on top of my rent payments. I always know how much I have reserved for the monthly payment and I never have to worry. I should probably start doing this for my credit card bill, but I haven't really been spending much lately so it's under control every time the monthly billing cycle is up.
What else you can use a savings account for:
- Saving for a vacation
- A new purchase like a MacBook Pro, a new TV, or a new couch
- Virtual assistants if you have a blog to free up your time to work on what you want
I use my savings for this stuff also on the rare times I actually buy something expensive for myself. One example was when I bought my girlfriend a MacBook Pro a couple of years ago. This was when I first got a savings account, but then promptly removed it because I didn't have any use for it after.
I know you're thinking I didn't need to get her such an expensive computer, but it was worth it. You get what you pay for. Before she had some Acer laptop and it was terrible. The charger was always plugged in so it fried the battery and always shut down when it accidentally came unplugged. It also crashed like 3 times in the past. She had it for 5 years so it was time to get a new one. I'm a huge Apple fan, so in my eyes nothing is better than a MacBook Pro, I don't care.
So, I planned 4 months ahead to buy the laptop for her. At the time it cost $2,000. I set aside $125 a week to get it in time for her birthday and it was no problem because I made sure the deposits into my savings account were small enough and early enough that I wouldn't feel the psychological pain of essentially losing that money when I could otherwise have invested it. Also, she never asks for anything so it was the least I could do!
What not to use a savings account for:
- Growing your money short-term
- Long-term investments
- Large purchases like a down payment on a house
If you're trying to save for something that's a huge purchase in the near future, say 5-10 years, you should use a money market fund or a certificate of deposit (CD). My savings account earns .05%. It's a joke. What the hell is the point of that? I hate when the bank tries to sell me on that. I'm like dude I could grow that money faster through a side gig give me a break.
So what's a certificate of deposit? It's a savings certificate that has a fixed maturity date and a specific, fixed interest rate for a period of time. You cannot touch these funds until the maturity date, which is why it's good to plan ahead and make sure you aren't going to need it for buying a house or some other purchase any sooner than that.
I can get a 5-year certificate of deposit with my brokerage account for a rate of almost 2%. That's literally 40x better than the rate in my savings account.
If you expect to save for a large payment in 5-10 years, don't keep it in a savings account, it'll never gain significant interest. If you were to save $40,000 in a savings account, that would get you about $40,100 at a .05% rate. If you put it in a 5 year CD at a 2% rate, that would get you about $44,163. Over 41x more!!
You also don't want to expose any short-term purchases to the market since you never know what could happen tomorrow. The average bull market lasts around 8 years and the average bear market lasts a little over a year from what I've read. Sure there are the exceptions, but that's the average.
Consider those who were saving to buy a house in 2007-2010. That, along with the financial crises would've wiped out, in some cases, literally all of your investment if you put that cash in stocks. Never invest in stocks for the short-term, always for the long-term. Like Warren Buffett said, “If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes.”
Do not keep your emergency fund in a savings account
What I do instead is in my brokerage account there are options to place my emergency cash in different types of money market funds. These funds offer up to an estimated 1.38% rate of return. That's over 27x better than the rate in my savings account.
Money market funds are investments where the objective is to earn interest while still holding the net asset value (NAV) of $1 per share. The fund is made up of short-term, less than one-year securities. These securities are highly liquid, meaning you can easily remove them from your account should you suddenly need them in the event of an emergency. The idea is it's a safe place for people to have easy access to cash. The only downside is these aren't covered by the FDIC which is the Federal Deposit Insurance Corporation that provides insurance allowing you to get your money back after a bank failure.
Always make sure you're putting your savings account to good use. Remember what it's purpose is for. You NEVER want to use it for long-term investments or anything, in my opinion, that you're saving for in the short-term for a larger commitment like a down payment on a house. Even in a savings account, I wouldn't feel safe keeping a short-term investment in it, because you can get such a better rate from a CD.
Remember though, always have enough at the end of the day to enjoy life! There's no point in doing all of this if you're not going to enjoy the journey. Save more and invest more, but don't miss out on the present.
What do you guys do to put aside the money you're trying to save? Do you always use a savings account?
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