When the job ends on December 31, I’m planning to consolidate all my checking and savings accounts into just three: a checking account, an emergency savings account, and the self-escrow account to pay annual property tax and insurance bills. Right now I use one checking account as a “pool” from which incoming cash is disbursed to a half-dozen “cookie-jar” accounts dedicated to various expense and savings needs. Yesterday, thinking ahead to what the simplified system will look like, I added up all the money that has accumulated in the cookie jars and then estimated the last few pittances due next month. And I was astonished to discover how much cash has quietly accrued, painlessly, without my trying very hard to save.
Hang onto your hats, folks: over $26,500 is sitting there in the credit union!
That’s about $16,500 more than I thought. What accounts for this startling windfall?
Well, near as I can tell, the combination of a small extra income stream plus certain frugal habits builds saving into your lifestyle in ways that you hardly notice. For example:
• Use a budget to help you live within your means.
How it works: By establishing limits to how much you spend, you rarely spend more than you earn, and you occasionally spend less. Every time you come in under budget, the money you didn’t spend tends to accumulate in your checking account.
• Automate your savings.
How it works: Ask your bank or credit union to divert part of each paycheck to savings. What’s left in your checking account is the amount you view as your net income, and you don’t even think about the savings set-aside. It’s already done by the time you start to budget.
Also, take advantage of any 401(k), 403(b), or other retirement schemes your employer offers. These allow you to save—automatically—with pre-tax dollars, and if your employer matches contributions, you get double the savings at half the hassle.
• Pay yourself first—and last.
How it works: Got money left over at the end of a pay period? Transfer it into a savings account. It doesn’t hurt to have two savings accounts: one to hold automatic savings “payments” from your paychecks for the long term, and one to hold leftovers, which can be used to reward yourself with indulgences and vacations.
• Live within your former means.
How it works: When you get a raise, leave your spending level where it was. Add the new income to the amount your bank or credit union automatically transfers from each paycheck into savings.
During the first six months of 2009, GDU’s ill-advised furlough scheme cut my income by $240 per paycheck. In that period, I learned to live on a lot less pay. In July, when the university started paying us our full salaries again, I continued to live on the “furlough” budget and put the extra income into savings.
• Drop your spending level a small amount at a time.
How it works: Reduce discretionary spending in small, tolerable steps. This allows you to get used to a smaller budget, and a smaller spending budget leaves more from your income to put into savings.
The layoff message has been scrawled across the wall for a long time. At my office, we’ve known since summer of 2008 that sooner or later the university was likely to can us, and as we’ve seen, that suspicion was confirmed in June. This has given me time to reduce my habitual monthly expenditures from about $1,500 a month to $1,200 and then to $1,000. Or less! The past couple of months I’ve managed to keep the spending in the vicinity of $800. Because I’m still earning until the end of December, all that unspent income has gone into savings.
• Snowball and snowflake savings as you would snowball a loan.
How it works: The “snowballing” principal suggests that you can accrue funds to pay down debt by focusing on a single account and then when that’s paid, add the amount you were paying against that debt to the amount you’re paying against the next debt, speeding payoffs incrementally. “Snowflaking” entails applying every windfall and every bit of “found” money, no matter how tiny, to paying down debt. Well, you can apply that to saving, too:
When you’ve paid off a debt, the amount of the payments can go into savings, rather than being diverted to restaurants and indulgences. Same with unexpected bits and pieces of money—gifts, extracurricular jobs, overtime, bonuses: stash the money in a savings account before you can diddle it away.
Every little bit helps. It’s amazing how fast these dribs and drabs add up. When I paid off the second mortgage on my house, I had the credit union put the $169/month into savings instead of leaving it in my checking account. Same with another $200/month payment I managed to escape. Lo! That’s $369 a month, $4,428 a year of “free” money.
• Divert all income from a second income stream to savings.
How it works: A key way to protect yourself from layoffs, pay down debt, and build savings is to build a second income stream. If you don’t need that income to live on, for heaven’s sake keep it!
I have three side income streams: teaching, blogging, and freelance editing. None of them earns much, in the large scheme of things. Taken together, I probably haven’t netted ten grand in 2009. But everything I earn from these ventures has gone straight into savings. Over time, as we can see, it certainly has added up.
It has added up: so painlessly that I hadn’t even realized how much, really, was stashed in the half-dozen credit union accounts I’ve been using. I have to admit that I had no intention of keeping that much money in low-interest checking and savings accounts.
I’d figured to start unemployretirement with a base “cushion” of $10,000, which I expect will tide me over the first year when Social Security rules will allow me to earn no more than $14,160. Ten grand plus $15,000 of Social Security plus $14,160 of teaching income should just net enough to cover my expenses. So, next month, when I’m certain of how much is in there after my last paychecks, vacation pay, and whatnot, I’ll transfer about $16,000 of those surprise savings from the credit union into my investment accounts.
If, as my financial managers expect, the economy continues to grow in 2010, that should go a long way toward reviving my retirement fund!