Learning from the FNBO Direct “Pay Yourself First Challenge”

December 14th, 2008 · No Comments

Earlier this week I submitted the paperwork with my employer to change my whole paycheck to be direct deposited into high-yield savings accounts rather than an almost-no-interest checking account.  The idea we’d had was to earn more interest on the money until we needed to use it elsewhere now that we’d figured out how to avoid running into the 6-transfer-limit that the US gov’t imposes on transfers out of such accounts.

Enough pennies can really add up

Then, today, I logged into the FNBO Direct website to check on a transfer to savings I had made earlier this week and noticed a new side-banner for the “Pay Yourself First Challenge”.  FNBO Direct has setup this website to track the savings progress of five of their everyday customers, who have switched their direct deposits to their savings account, over the course of six months to show how it can help people save to meet specific goals.  They say:

Pay Yourself First means depositing your paycheck into an FNBO Direct Online Savings Account (OSA). When bills are due you simply transfer just what you need from savings to your FNBO Direct Online BillPay account. Whatever’s left over – whether it’s $25 or $500 — stays in your OSA and earns an interest rate that is seven times higher than traditional saving accounts.

While I applaud what they’re trying to get people to do, and think that they’ve provided a good start to descriptions of the process as well as links to find out more information, one thing I think is conspicuously absent in the high-level description is any mention of the federally imposed limit of 6 withdrawals per month from these high-yield savings accounts.  Anyone trying to duplicate this challenge on their own needs to know about this before they get into trouble!  They should not expect to put their paycheck in one of these accounts and access their money like it was in a checking account with both ATM withdrawals and transfers out to pay each individual bill — your provider will be forced to close the account on you if you do this!

Here’s what we do to ensure we don’t get into problems with the 6-withdrawal limit.  First, we pay all regular expenses via credit cards.  This accomplishes a couple things such as giving us discounts via cash back and rewards, allowing us to earn interest on funds via float, but more importantly for this process, groups them all into a single bill that only requires one withdrawal from the savings account each month to pay.   Second, we split my direct deposit directly from my employer into multiple high-yield savings accounts so that we get more than 6 withdrawals each month which allows us to make them closer to when each bill is actually do.  Ideally, we’d do this such that each paycheck was split into an account for regular expenses, one where we average out irregular expenses, and one for miscellaneous savings.  However, my employer asked me not to split it between more than two accounts, so we’re just using the first two and making a single large transfer out to a checking account for further distribution to our many purpose-specific savings accounts.

And, very importantly, for a fall back (which we’ve already used once when we experimented with putting the bulk of our money in a savings account) we rely on the ability to open yet another new high-yield savings account and thus gain 6-more transfers within the month.  For this to be effective, we need to make this move once we hit 5 transactions in a month so that our sixth to fund the new account doesn’t put us over the limit.  Also, we need the ability to do this instantly such as at ING Direct, though I guess it would also work somewhere else if we didn’t need the money soon and could wait through the hold period many other institutions put on funds used to open a new account.

Another method I’ve read about that avoids hitting the withdrawal limit is well worth mentioning.  This idea is to make weekly withdrawals where you’ve figured out in advance the money you’ll need in your checking account to cover everything you’ll spend in the coming week.  This should cover bills, cash, transfers and anything else.  This works because no month ever spans more than 5 weeks and most only span 4.  You’ll have an extra withdrawal or two to use in the event you made a mistake and/or had an unexpected emergency.

I should point out that while I’m talking about going over the limit like it’s catastrophic to your financial well-being, you shouldn’t treat it like the end of the world if you don’t need that specific account or relationship with that institution.  The consequences are probably specific to the institution you’re using so you should check with them in advance.  In our case, I’ve read on other blogs that ING Direct confirms that going over the limit only causes them to close that one account and not all accounts you have with them, at least as long as you don’t go over the 6-withdrawal-limit all the time on your accounts.  They don’t stop you from opening new accounts to replace the one they’ve closed.

Back to the FNBO Direct challenge, it’s not so much a contest for you to participate in — they’ve already picked the 5 users they’ve challenged to save more of their income.  But that doesn’t mean you can’t make similar changes on your own and use the lessons you gather from reading their site on your own.   I certainly plan to check back and hope to learn helpful tips from them!

Tags: Checking · Savings

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