Squirrels gather and hide stores of nuts for winter. Sometimes they hide them so well that they can’t find them right away and have to get creative in finding them. It seems natural, but even somewhat useful in certain cases. The fact that it is there, just waiting to be found, is comforting. “It’s not gone so I won’t starve… If I can just remember where I left them.”
The second hardest part of regularly saving money is getting the habit in place. The actual hardest is sticking to the habit. There are more systems in the economy designed to help us part with our money than there are to save it. It is easy to say “save all your bonuses and extra income as well as 10% each month,” but that requires conscious effort.
I started a system over a year ago that removed the manual work from saving and finally set me on track to grow all my savings accounts without me having to do the mental and manual work to hold myself accountable. The key? Automation and friction.
Let’s start by pointing out that most standard savings accounts are worthless. They generate no actual interest and normally come with restrictions on withdrawals. There are High Yield Savings Accounts out there, though that at least will give you some interest on your savings. They all come with stipulations, like direct deposit requirements or minimum deposit amounts, neither of which are too crazy. If they require some level of deposit, normally $1,000 or so, you may need to start there.
Now, I am not getting paid for this, so do a quick Google search for the highest interest savings accounts and find two separate ones that offer reasonable rates and transfer compatibility with your current financial ecosystem.
With that one explanation out of the way, here is the system that I use to save.
The Accounts
Operating Funds
This is my checking/spending account or what I call my Operating Funds account. All my bills come from here. I use a credit card for points and pay it off every week out of this account. The interest rates in this account are non-existent, but that is not the point. This is the only account I spend from.
Emergency Account
This is my lowest rate high yield savings account (currently 3.5%) that all my funds go into. Paychecks (less withholdings, including 401k contributions), random income, FSAs, etc. all feed this account. It is easy to move money into all my accounts from this bank, so if I need to access more money than is in my checking, I can within 1–3 business days.
This account is also my emergency fund for that reason. It still earns interest, but I can get to it quickly. It does have a debit account for extreme emergencies, but I like to think that any emergency that would overdraft my checking should be able to wait 1–3 days.
Savings Account
This is my highest interest rate savings account (currently 4.7%). It is linked only to my Emergency account so it is easy to move money into.
It is purposefully not linked to my checking account account. While this account is still liquid and could be used for any big emergencies, it takes 1–5 days to get into my emergency account, so up to a week to get to my checking account. This puts a lot of friction into the spending process. Again, if it is that big of an amount, it can normally wait a few days.
Investing Account
This is my stock account where I hold some index fund shares. I like to invest here as a wealth growth tool and a last resort emergency fund since I can always sell them off. It is linked to my emergency fund account.
Retirement Account(s)
I have one account with a financial planner that holds IRAs, Additional retirement Savings, and kid’s college funds. I always take my 401k match plans with work, but anytime I change jobs, I roll them into this account. This money for me is untouchable until I am ready to retire.
If you can’t tell, I really like having my money accessible. I have a generally low risk tolerance and have had enough black swan events in my life that I needed access to money to avoid taking on debt. I am not a no-debt fanatic or anything. I am pretty sensible about financing modest cars, having a mortgage, and even student loans after many years, but these debts are consistent and budgeted for and have their own payoff plans through my operating funds.
So with those five account types secured, how does my system work on a monthly basis?
Consistent Flow of Funds
Each month, paychecks flow into my emergency funds. Regardless of pay periods, they flow right in. From there, I pay my Operation fund.
I have a set amount that transfers on the first of the month, 75% of my average monthly pay to be exact. Well, it was 75% of my average monthly pay two years ago. I have had raises since, but my budget is reasonably comfortable, so I have not increased my monthly budget. In fact, my operation fund has grown to the point that it has its own buffer for a spend-heavy month.
Limits and Distributions
I check all these accounts only on a monthly basis aside from my Operation Fund, which I review weekly. Each account has a set target for them to get to and a maximum amount I want in them in terms of monthly budget. So once they reach that limit, I move funds to where they are better used.
My Operation Fund has a 2 month of expenses maximum balance. This lets me save for vacations or special purchases and see that progress in my daily spending account.
Once that limit is exceeded I roll any extra into my Emergency Account that has a target of 4 months of average expenses maximum in this account. I don’t want more than that here since the interest rate is not the highest. Interest still is paid monthly here, contributing to the growth.
Once the limit for my Emergency account is exceeded, I then move money to my Savings Account. The target maximum for this account is 8 months of average monthly expenses. The idea is that I have a total 12 months of total liquid cash in the event that I am unemployed for a long period or something really big comes up.
Once that target account value is reached, I am able to contribute to my Investment Account. I have no desire to work until my projected retirement date if I can afford it, so having this as my gap account gives me a lot of peace of mind. Furthermore, if I choose to invest in anything else, this is a fund waiting for those sorts of active investments.
My Retirement Account, again, is untouchable. I have my retirement date set and all the retirement plans if everything goes monotonously according to a plan where my pension is predictable and conservative enough to keep me housed and fed until I cash out. I contribute to my match level at work and some extra.
I pay this extra right out of my Operation Fund, like a bill. It gives me freedom to adjust the extra amount or hold off completely, in a pinch. It’s all about flexibility.
The System In Action.
We will use $135,000 as an annual household income for some round numbers, assuming a 30% tax rate and 4,500 in annual deductions. I know this isn’t likely what anyone’s exact paycheck looks like, but it’s an example
An average monthly income of $7,500, after those pesky payroll deductions, goes into the Emergency Account. Normally paid bi-weekly so $3,500 per week. Some months end up with 3 paychecks. Yay Extra!
On the first day of the month, $5,500 goes into my Operating Fund, without fail. I have all my bills set to come out between the 3rd and 10th ($3,500). So that is going to have about $2,000 left in my account to spend that month. Having this budget determined as early as possible helps me plan my activities accordingly and not run thin. I normally aim to keep food, gas, and entertainment under $1,700, allowing me to net about $300 every month for those purchases or vacations.
This let’s my Emergency Fund grow by $2,000 Every Month. At this pace, even starting from zero, I reach a full Emergency Fund in 11 months. At that same pace, my Savings Account is maxed out in 22 more Months without digging deep to save. Every month is the same and can be planned on. Chances are that in those three years, you will have some raises and bonuses as well that reduce this timeline notably. Afterall, since your operating income is consistent, all extra income goes to savings. This budget is all about savings and consistency in spending, after all. Sidenote: A wonderful side effect of this for me was resisting the temptation of lifestyle creep.
Using the $5,500 as our average monthly expenses, The interest on maxed out accounts would be:
Operating Funds account — $11,000 and $0 interest
Emergency account — $22,000 and roughly $700 interest each year (@3% APY)
Savings account– $44,000 and roughly $2,000 interest each year (@4.5% APY)
Will This Work For You?
Is this an exact formula or science? No. It is not even financial advice. Seek some professional help for that. I don’t know what your pay or expenses are like, so no, I can’t say for sure it will work for you, no. All I can say is that this system worked for me, someone who has struggled their whole life with saving and lifestyle creep, to escape the paycheck to paycheck lifestyle and build some level of security in insecure employment as I took chances in Startups. It also helped me budget a humble, but comfortable lifestyle on a consistent budget that I felt I could maintain for a long time. It kept me from reaching into all the available money I had to buy the latest clothes and gadgets. It helped me purchase a house and car I could actually afford. Most of all, it helped me rise above the anecdotal statistic that 80% of people don’t have an emergency fund, proper savings, and are somewhat concerned about money.
The “set your budget and hide the rest” mentality makes me feel like I have less than I do, keeping me conscious of my spending without having to beat myself up for not saving more. I don’t think about it. In reality, I can go months without looking at my accounts, because I became comfortable with my budget, which helped me cut back some as inflation came crashing in, because I did.
I hope this can inspire others to find creative ways to squirrel away some money, even if this is not it. I am no fortune teller, but it seems like inflation isn’t going down anytime soon. Neither the economy nor the job market look like they will stabilize for a while. Worse, l don’t see retirement getting easier for Gen X or younger. Sadly, I doubt I will win the lottery, either. The only option I had left was to find some way to spend less than I make, and with the lack of self control many of us share when it comes to spending, I had to create friction in my spending and hide my money from myself.
What enables your savings? I would genuinely like to hear.