saving #2: pay yourself first

one of the things that financial people always stress about saving is to make sure you're saving diversely. while we all implicitly understand "diversity", especially if you went to my high school, not many of us understand what it means in the context of money. next week we'll cover diversifying your savings, but in order to diversify, you're going to need something to work with. this bring us to another principle financial people talk about, although not enough for my taste- saving systematically.

now that we know *where* to put our short term cash funds (you're all supposed to shout "high yield savings account!"), we need to know *how* to put it there, or in other words, where to get the cash for the stash. i used to think that the way to save money was to not spend any money, i.e. i'd get paid and then pay all my bills and then try and use as little as possible for the rest of the period and then if i had any money left over right before i got my next paycheck i'd stick that in my savings account. not only was this a very stressful system, because i was constantly trying not to spend any money, but it was pathetically ineffectual- for some odd reason, i never seemed to have any money left over. this brings me back to my first point about managing your money, and something i promise to beat like a dead horse because it is THE MOST IMPORTANT THING YOU CAN DO FOR YOURSELF, which is keeping track of your expenses. once you have a sense of what you spend things on, then you can see how much you can afford to save.

notice the odd phrasing of the above sentence- "afford to save." this is where i work some psychic voodoo on you for you to realize that all our (or at least my) ideas about savings were all backwards. instead of putting saving money as the last thing on our list, the thing we do when we've already spent it all, we need to move it up to the top of the list. hence the "pay yourself first" tag. when you start to create a budget for yourself, your savings amount should go right at the top with your rent, phone bill, etc- all your fixed expenses. and you should know how much you can afford to save each month because you've tracked your expenses and created a budget. why pay your landlord, zabar's, fairway, fresh direct,etc before you pay yourself? sure, it sounds a little hokey, but in all honestly, increasing your savings rate will afford you a host of options in the future:

1. the ability to live on less that you earn. this is a very important trait especially in the now volatile job market. if you ever get laid off unexpectedly, you won't need to hold out for the same salary you made at your previous employer (although, of course, you should try to) because you now know how to live on less. conversely, if you ever get a raise you can bank the whole increase and continue to live on what you earned previously. i'm still living on the first yearly salary i ever earned- which was about 4 years ago.

2. a larger pot of cash sooner for your emergency fund, your house, your new business, your round-the-world vacation. saving systematically allows you to see your money growing at a steady clip and plan for your future goals better. (omg i sound EXACTLY like my father. how did this happen??!!!)

3. money for retirement. okay, i know, we're only 1/3 of the way through our lives, and here i am blabbing about retirement. we don't even have kids yet! it does seem really weird to be worrying about this now, but the truth is that the sooner we start saving the more money we will have. this is due to the best of all the miracles: compounding interest. see: here, here, and here. also, most importantly, at this point in our lives we can borrow money to subsidize our dreams; you can get a loan for a house, a car, a new business, your kid's college, but no one is going to lend you money to rent out that villa in tahiti and isn't that so much better than spending your 75th winter in that 5th floor walk-up?

all savings accounts will offer you the option of automatically transferring money at any given point in the month. for example, i have my ING account withdraw $X dollars from my bank account every 15th and end of the month. this way, when i start spending my most recent paycheck, i don't have to worry about saving anymore; it was already done. even if you only put $5 into a high yield savings account every time you get your paycheck, you'll get in the habit of savings. and you'll get excited about watching your money grow. this might be bordering on obsessive, but every time i have a lousy day i always get excited at the prospect of checking my account balances because they've usually increased while i wasn't noticing. i can't think of another circumstance where something grows most fruitfully when you ignore it, but an automatic savings account is a rare gift.

one last note: if you are in the situation where you have some considerable debt and are waiting to save after you've paid down your debt, please don't wait. i know that the interest you're paying on that credit card will always be higher than anything you'll earn in a high-yield savings account, but still please don't wait. think about this: you've paid down that credit card and are now debt free, but still lack any emergency savings. unexpectedly, your wisdom teeth need to be pulled and because dental insurance is always bad, end up stuck with significant bill. without a cash cushion, you have no option but to use your credit card, landing you right back where you started. i know it sounds bleak, but it has happened to actual people, pretty often, and it such an emotional struggle to recover from. don't let it happen to you. you can save *and* pay down your debt. it is possible!

p.s. i'm sure you get it by now- i'll post this super cute picture hoping you think it pertains to this post in some way so that you'll read it. thanks for reading!

saving #1: money in the matress

yes, yes, we all hear it- the mantra of our parents to "save, save, save". like much of the advice we get as children and teenagers, it is vague and virtually useless. no one tells you how, or how much, or where. if you try to do a google search, you'll turn up a million different companies that want your money to do who-knows-what with. well, that's all changing now. in the next couple of weeks, i'll lay out the various strategies you can employ in saving money, how to determine how much (and where) to save, and most important, EXACTLY how to do it. it's going to be a long haul, so be warned.

high yield savings accounts

right now, you've probably got a checking account at a regular bank that is linked to a regular saving account. mostly likely, your savings account is earning around 2% interest and that checking account is earning less than 1%. (you can check these numbers by calling your bank) currently, the inflation rate is around 3% on average (actually, right at this moment it is higher, but i'll explain this another time), and with the markets tanking, this is likely to rise soon.

what does this mean for you?
well, #1 is that volatile goods like food and gas are going to get more expensive. and #2, if you're currently earning less than the rate of inflation in your bank accounts, you're actually *losing* money; that is, over time your money will buy you less goods. people are encouraged to put their money in the bank instead of under their mattress because in return for giving the bank your money to invest, the bank pays you interest on your balance; basically you earn money just by having money- like the old saying goes "the rich just get richer". but if what you are earning in interest is lower than what you are having to pay in rising inflation, you are still theoretically putting your money under the mattress- i mean, it is safer in the bank because it is insured against loss and you can use online bill-pay and you don't have to sleep on a huge lump and you're making an teeeeensy bit of money, but it's basically the same.

so, what to do?
in subsequent posts we'll figure out how to craft your financial goals and your saving and investment strategies to match those goals. creating and keeping a budget is a important first step in the process. but right now, a good idea would be to open up a high-yield saving account, which is a regular FDIC insured savings account with a higher interest rate than average. with the Fed cutting interest rates left and right, opening one up now means you might still be able to take advantage of higher interest rates before they drop. you can transfer the money out of the account to a brokerage account or a CD, or even back to your checking account if you want, but having a chunk of money earning more than inflation is a good way to hedge your bets against the rising prices to come.

how to do this:
first of all, determine how much money you can put into this account. you can determine this by figuring out what you're comfortable with having in your regular checking account to cover all your budgeted expenses. i'm fine with just having $1,000- all the rest of my money is other accounts. other people might be comfortable with a different number; grace needs at least double mine to feel secure. this doesn't mean she spends more than me, just that she more comfortable with that number. money is inextricably tied to our psychology, like it or not. next, determine your liquidity needs. do you often have emergencies where you need to dip into your savings (and i don't mean that really expensive and delicious triple cream french cheese you saw at whole foods, andrea!)? if so, you might want to consider opening up this account with your current bank- most major banks offer these accounts as an add-on option to your regular accounts. always always always check about addition fees and minimum balances however! if you are the kind of person who, if they know they can walk to the nearest atm and hit the 'savings' button, will buy that really expensive (and truly delicious!) triple cream french cheese, then you should probably opt for an online-only account. this gives you a layer of protection from yourself, as you have to wait 2-3 days for the money in the account to be transfered to your regular bank, but it also means you have less liquidity. (confused about that word? don't worry, i'll explain it another time)

now you know where you want to open up the account (either your bank or online) and how much you want to put into it. by the way, this doesn't mean you have to close your savings account- you can still leave some money in there if it makes you more comfortable. here is the really hard part- go and open the account. if you take a look at this chart, you'll see all the different rates for various banks. note that these rates are for TODAY only, they often change (but not by a ton) everyday. to give you some perspective, when i opened my ING Orange account at the height of the market, the rate was 5% and there were even some banks offering 5.5% returns. you won't find that now, but growing your money at the 4% they are offering you now is still far better than what it will probably be in a couple months, and is obviously much better than the 2 or so % you make at your regular bank- so start today!

by the way, it is very easy, and safe to open one of these accounts, just make sure it is FDIC insured and don't put more than $100,000 (yea,right!) into one account. it takes maybe all of ten minutes and you can set up automatic transfers every month, which we'll get to next time.

if you have any questions, feel free to email me.

ps. i had to post this cute picture of wally so that you would be implored to read this post. if you got this far down, congrats!