As the days of 2017 wane so does the remainder of my severance pay. My goal was to not touch the six months of take home income I’d saved until January 2018. Thanks to the first budget I’ve ever been able to stick to, I can say, “Mission accomplished,” and with a little help from the Debt Free Diva’s scavenger hunt I even managed to do it pretty comfortably.
Alas, after riding four weeks of severance for a month and a half by mid January it will be time for me to officially break the glass on my emergency fund.
The fact that I even have a bank account with enough money to buy me time to get my shit together is pretty unbelievable considering that I saved the majority of it prior to following a budget. According to my Sankey diagram* (found the idea and template on the site Get Rich Slowly), with the exception of housing, the biggest category my income flowed into this year was savings.
I have been pretty candid about my ability to spend and waste money in all sorts of ways (does anyone want vintage New York City subway scrolls?). I’ve even admitted to “borrowing” from my emergency fund for not quite emergencies. So when it comes to saving so much it kind of begs the question.
Skimming Off The Top
For me the key to saving money has always been the magic of direct deposit. I know that a lot of people advocate for automatic withdrawals from checking to savings, but I don’t trust myself to let money allocated for saving touch my operating account for one second. I know me and if I can see it then I can find a way to spend it. When I first started working after college I was fine keeping that savings account at the same bank with my primary checking. However, as I got better at adulting I also got more comfortable shopping, traveling, and making large purchases.
To keep my savings account further out of sight I moved it to a different bank. After cycling through several homes the account now resides in an out of state bank with no branches in a 600 mile radius. I don’t even have an ATM card for the account. To quote the great poet and orator 2Pac, “it’s untouchable like Elliot Ness.”
The Rest of It
Since graduating from undergrad I have always been at the very least a consistent saver. Sure, I could have saved more but doing it was never an issue. Managing the rest of my money was another story.
I always paid my bills on time, even in my broke days when I slept on the floor because I couldn’t afford furniture. The issue was making it from payday to payday with funds in my checking account. Depending on whether or not I was using credit cards I could also be adding high interest debt to the problem. I was never in financial trouble or dire straits, but outside of my savings account my money was going nowhere fast.
The Golden Age
I was listening to episode 51 of the Paychecks and Balances podcast featuring guest Sam Dogen, the Financial Samurai. At the 15:17 mark Sam said, “If the amount of money you’re saving each week or each month isn’t hurting you, you’re not saving enough.” Now I’m not going to lie and say that I’ve followed this advice throughout my life. However, over eighteen months from 2010 to 2012 I upped my savings higher than I ever had in the past.
I had a goal to save $20,000 before starting grad school. Up to that point I had never saved more than $200 a month. Every month I had $1000 direct deposited into my savings.
As painful as it was at first, I eventually got used to not having that money. Heck, I got so used to it that I found a way to fit a $2000+ flight to Africa into my regular cashflow. I enjoyed the Philadelphia restaurant scene and discovered the treasure that is ModCloth. I did all of this without a credit card, or living paycheck to paycheck, or a budget.
I didn’t have money (well not a ton of it), but I did have bank accounts. As I’ve said before, I don’t like my money to mingle. I keep accounts for different kinds of expenses. I’d always done this, but I perfected my system during this time.
Three and Three
Without meaning to I’d set up my finances in such a way that kept my checking flush while also covering irregular expenses and midterm goals. At the time I had three active checking accounts and three savings.
- Emergency Fund – Put on your own oxygen mask before helping the passenger next to you. I don’t care if it’s a money market or a regular savings account as long as the money can be accessed within 72 hours without any fees or penalties. An emergency fund allows you to save yourself if your ship starts sinking. Three to six months of living expenses is recommended. I say take the millionaire’s advice and save until it hurts.
- Shit Happens – Cars break down. Phones get misplaced. Keys get locked inside the car. Family emergencies require last minute travel. While these things can seem like an emergency in the moment, they’re often more urgent than emergent. In order to give your emergency fund a fighting chance it’s a good idea to have another stash that can cover the last $100 of that $500 flight your checking account didn’t quite have.
- Saving Up For Something – I decided in January 2010 that I wanted to go to home to West Africa in December to spend the holidays with my family. I then set up a direct deposit to save a specific amount every month and planned to purchase my ticket in July while fares were still low.
Now you know I wasn’t responsible enough to do all that. What I did do was take a chunk of my annual bonus and shove it into this account so I wouldn’t spend it on clothes. I added to it when I could and bought my flight about four weeks before I left. That’s why it was over $2000. Do what I should have done, not what I actually did.
- Rent/Mortgage Account – In all of the money mess ups I’ve made in my life the one that I have managed to avoid is accidentally (on purpose?) spending my rent money. How did I avoid such a fate? I keep that money in a separate checking account (no ATM card) funded in equal installments each pay period via direct deposit. It is then automatically paid to my landlord or lender.
- Bills Bills Bills – After one unfortunate winter that brought me a nearly $600 December heating bill, I started setting aside the money for my utilities in a separate account (without an ATM card). Just like you don’t want to accidentally spend the rent money, you also want to put up a fence around the money for regular bills like utilities, internet, cable, cell phone, gym membership, whatever. I set up autopay then let it ride.Because these bills can fluctuate, I chose to add a bit of a buffer to the account. If $100 would normally cover me, I’d set up direct deposit for $125 just in case. It’s easy to impose a maximum on the slush fund in the account and then sweep anything over that into one of the savings accounts or to improve cashflow on occasion.
- Primary Checking – This was always the account where my debit card lived. Groceries, cabs, restaurant week, gas money, manis and pedis, shopping and all of my other everyday expenses came from this account. I did whatever I wanted within the bounds of what was in my checking. At the time I probably had about $500 per check to work with after funding everything else, but I’d also previously managed pretty well with less than that.
There Is a Catch
Setting up my finances with these accounts took the job of thinking about my money out of my hands and built it into a system that worked. I was hitting my savings goals, my bills were taken care of, and my rent was paid.
This method worked great for me in the eighteen months prior to grad school. Three years later, making similar money and paying the same rent it didn’t work at all. Why not? Credit cards.
Now I am not anti credit card. Rewards points make my heart sing. However, they do not make everything groovy if you’re paying interest on the purchases that earned those yummy rewards. Because I spent whatever was in my checking account as I pleased I had no clue where all my income was going. However, I could see my available balance steadily decreasing which kept me in line.
When I incorporated my credit card into this system the balance in my bank account remained the same and it was too easy for me to spend beyond it on a whim. Because the money in my other accounts was already earmarked for other purposes credit card debt once again became a regular part of my personal balance sheet.
Look, I know what you’re thinking. “Not everyone carries a balance.” But 65% of credit card users don’t pay off their balance every month. While I’m sure you’re in the 35%, are you sure you’re not overspending when swiping (or is it chipping now)? Studies show that people spend 12-18% more when using credit versus cash. Although we are all special, unique individuals, I’m going to go out on a limb and assume that just like me, you aren’t the unicorn who can mentally track all of their credit card spending to ensure it never exceeds what’s in the bank all without any plan for the money. If you are this mythical creature then I humbly submit to your power.
If your unicorn horn was lost in the mail like mine was, then I’d recommend not setting yourself up for 15+% interest or to need to make periodic withdrawals from your emergency fund to keep the finance charge at bay. I was fine charging recurring bills, but found it impossible to use my card for variable spending and stick to the amount in my bank account rather than my available credit, and I don’t think I’m alone in this.
The only time I’ve been able to regularly use credit without spending more than I want to is when I’m following a budget. Already have a stash of plastic? So did I. I ditched the cards and kept the accounts open for the credit score benefits. Win-win.
But Budgeting Sucks
Between laying out the information the way I wanted to see it and figuring out where in the hell I actually spent my money, it took me hours to set up my budget. It was a pain in my ass. I’ve sat with friends as they’ve made their budgeting attempts and without fail there is always at least one meltdown. Whether it is seeing how the money gets spent or trying to allocate where it should go, frustration is a part of the process. I don’t blame anyone for not wanting to be bothered with it.
The thing is when we give up on the budget we usually operate on the “I hope I don’t run out of money before my next check” plan, which causes it’s own set of frustrations that often have longterm consequences. For me, dividing my money into designated accounts relieved me of needing to figure out granular details but still set up a sturdy fence to keep my spending behavior in check. The multiple bank account method served as a bridge that while not perfect, was solid enough to get me a good bit of the way to a fully funded emergency savings account. Could I have gotten to this goal faster by following a budget? Yeah, but for a long time I wasn’t ready for all that. I found an alternative that met me exactly where I was.
Where are you on the financial management road? Are you hitting all of your goals without a budget? If so, how do you do it? Does budgeting bring weeping and gnashing of teeth for you? If you’re thinking about giving a budget a spin here are some templates. If you just aren’t there yet then check out Ally or Capital One for free savings accounts. As always, leave your thoughts in the comments.
*If you’re curious to see how different people’s money flows, check out some other bloggers’ Sankey diagrams: Othalafehu, The Big Law Investor, Jumpstart From Scratch, Atypical Life, Military Dollar, 99 to 1 Percent, The Frugal Gene, Time In the Market, and Max Your Freedom
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