Improving our chances of hitting short-term financial goals.

November 26th, 2008 · No Comments

My wife and I have recently made efforts to become better organized around more of our short-term financial goals.  While we use Quicken to show us our overall financial picture, it seemed to get pretty complex to keep track of some of these things in there.  So we came up with an alternative way to keep ourselves organized and on target.

Split your money into multiple small accounts

Split your money into multiple small accounts

Our solution isn’t exactly ground-breaking but it seems to have a number of noteworthy advantages, which I’ll describe in a minute.  What we’ve come up with is an expansion in the number of savings account we have, combined with the very un-ground-breaking process of making regular contributions to each.  We’ve set up a new account for each agreed-upon goal we’re trying to reach.  For example, we have an account to save for future vacations, one to accumulate money for irregular expenses such as auto and home insurance; one to save for our yearly property tax payment; one to build up investment funds until we can invest with less than a 1% transaction fee; etc.   In the past we tried to track the balances, in a single account, for all these purposes by memory (ha! that never came close to working) or by using categories and reports in Quicken.

The problem with using Quicken for things like this is that it was always a pain to get to the data when we needed it.  First, we were required to have an install of Quicken or remote access to a machine that has it installed.  Second, we needed sole access to the data file which we found hard to guarantee.  Third, if we stopped using Quicken, we were afraid we’d lose track of where we were because, in general, the sort of things we were doing weren’t exportable.  And last and most important, we had to remember how we were tracking each thing and figure out how to visualize the current state of it.  These difficulties led to us not expanding the number of things we were tracking over time.  Which is the complete opposite of what we wanted and needed.

Opening up a new savings account for each purpose resolves all those issues in one stroke.  We’re pretty much guaranteed to be able to access the balance and history from anywhere we can run a web browser.  Also, most banks support a number of electronic formats for exports, including CSV, so we’re not locked into any particular software.  And then there were the other advantages I mentioned earlier as well.

First, making regular contributions to the dedicated accounts in advance means that we are training ourselves to save for things we want.  This is much preferred over the feeling of panic we used to get as we scrambled to ensure we had enough funds to cover the bills when they came in.   Even if we made some planning mistakes and haven’t saved quite enough, the panic feeling is significantly lessened because we have saved some of the money to pay the bill.

Another benefit is that the planning of what to contribute forced us to go through a budgeting process of sorts.   While not everyone agrees on how to establish a budget, or what it should look like, what is important is that we have an idea of what our expenses will be for something more than the coming week, month, and quarter.  This really helps to cut down on spontaneous purchases because we saw unused money sitting in our account for a couple months.

One last thing I want to point out.  While this doesn’t apply to us, it occurs to me that if your goals are either optional, or significantly far enough out in the future, you might consider treating some of the money as part of your emergency fund if you’re having trouble building one up through other means.   While I wouldn’t recommend mingling your EF and this money, there’s no reason not to draw on this if you’re having problems meeting immediate expenses.

We’ve used ING Direct for all of our purpose-based savings accounts.   This is primarily because of how easy ING makes it to open additional accounts.   We’re talking less than 30 seconds to open and fund a new Orange Savings Account if you’ve got an existing account to start from.  They even let you provide nicknames for each account so you can remember what the purpose was, and the nicknames can be edited over time.   Lastly, they have a very nice account dashboard that shows you how much money is in each account plus the total over all accounts.  This makes it trivially easy to ensure you aren’t going over the FDIC coverage limit.

By the way, if you decide to open an ING Direct account and are going to deposit $250 or more, ING Direct will give you a $25 bonus if you let me refer you.  I’ll get $10 off the referral.   Just e-mail me and I’ll send you the referral e-mail — the system they have means I have to enter your e-mail address into their site.  I promise to immediately dispose of your e-mail address and not to use it for any other purpose.

Tags: Personal Finance · Savings

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