Tag Archives: savings

Is sticking to your budget hurting your savings account?

This post was originally published September 3, 2009.

piggy bank

“Wait, wait,” you’re saying. “Budgeting helps you make better decisions with your money, which should be helping your savings account. Isn’t that the whole point?!” And you’re absolutely right.


This summer, I learned a valuable lesson that I want to share with you. Sometimes being too rigid in your budget can actually lead you to make bad budget decisions.

This isn’t one of those posts about how you need to treat yourself every now and then to avoid burn out. This is about how sticking to a budget can sometimes make extra money feel, well, extra. And if it’s extra, why not just spend it? You deserve it after all that hard work budgeting, right? The problem is, this mindset can prevent you from growing your savings account.

I am constantly vowing to use the snowflaking method to increase my savings, but my strict budget gets in the way. If I receive unexpected “extra money” in the middle of the month, I often end up spending it. After all, this is extra money. I’m technically sticking to my budget, right? So I can spend this money on whatever I want.

It’s a bad habit, and it’s slowing down our savings progress. If we saved this extra money instead of spending it, we would be saving a lot more.

So how do we break this bad habit? I have a plan. Part of the problem is that I feel compelled to make a plan for unexpected money right away. Whether it’s $10 or $100, I decide how to spend it immediately, and more often than not it involves spending it on something we don’t need because, hey, it’s “extra.”

From now on, unexpected money will be deposited and ignored until the following month when it can be added to the budget. It’s much easier for me to commit money to savings when I’m creating a budget than it is for me to commit unexpected money to savings when the budget has already been set for the month.

I’m hoping that adding it to a budget will help me view it as part of our income instead of “extra money.” I’m much less likely to spend our regular income than I am to spend money that I don’t include as part of our income.

Is this a problem you face? How do you combat “extra money syndrome”?

Photo by alancleaver

Are you “financially fragile”? How to fix it.

According to a new study, nearly half of all Americans definitely or probably couldn’t come up with $2,000 in 30 days if they faced a financial emergency. Financial experts recommend keeping an emergency fund with enough cash to cover at least three to six months of expenses. Based on this research, it seems almost half of Americans would struggle to cover even one month in the event of a job loss or other emergency.

Considering the state of the economy over the past several years, this doesn’t surprise me. I have lived paycheck to paycheck in the past, and I know what it’s like when the money seems to leave your savings account more quickly than you can save it.

I truly believe that with some advance planning, though, most of these families wouldn’t be nearly as financially fragile. We were earning less than half of our current income when we finally began saving money. We went from barely squeaking by to saving a small amount of money every month without increasing our income.

By saving or earning an extra $160 a month, you could build a bare bones emergency fund of $2,000 (plus a little extra with interest) in one year. But how? Through a combination of spending less and/or earning more. Here are some ideas.

Spend less

Line-dry your clothing. The clothes dryer is one of the most expensive appliances in your home. By line-drying some or all of your clothing, you could noticeably reduce your electric bill.

Weatherproof your home. Seal drafty doors and windows with weather strips, update window treatments to insulating curtains or blinds, and take other steps to better insulate your home to cut your heating or cooling costs.

Add one or two vegetarian meals to your weekly menu plan. Reducing your meat consumption can make a huge difference in your grocery bill.

Lower monthly payments. If you have a lot of minutes left on your cell phone plan every month, you might be able to save some money by reducing your plan. Call insurance and utility companies to see if you qualify for any discounts.

Use Netflix, Hulu, and Redbox instead of cable for entertainment. Hulu costs anywhere from $0 to $8 per month. Netflix can cost as little as $9 a month. Cable costs $40 and up. You might be surprised how little you miss cable.

Downsize. Move to a smaller, less expensive house or apartment. Trade your fancy car for a reliable used vehicle with a lower (or no) payment. Become a one-car household.

Use cash for weekly expenses. This was the easiest thing I’ve ever done to cut spending fast. Set your weekly budget for daily expenses like gas, groceries, etc. At the beginning of the week, withdraw the amount of cash you’ll need. You’ll be amazed at how little you spend when you’re not unconsciously swiping your debit card several times a day.

Earn more.

Sell your stuff. Do you have shelves and shelves of DVDs and books and you don’t watch or read anymore? What about clothing you haven’t worn in years? Jewelry you don’t wear? Have a rummage sale or start liquidating your unnecessary assets at consignment shops, resale stores, or online.

Think like a teen. Clean houses, mow lawns, babysit. Start thinking of the ways you used to earn money as a teen. They may still be viable sources of income even as an adult.

Sell crafts on Etsy.

Find a part-time job for evenings and weekends.

I realize it’s easier said than done, but even if you can’t get to $160 or more per month, cutting expenses and earning more can help you start saving something, and that’s the first step to building your emergency fund.

What suggestions do you have for people who want to start saving to protect themselves from financial emergencies?

Photo credit

Why I’d rather spend less than earn more

This post was originally published on May 13, 2009. Now that I’m a stay-at-home mom, this post is truer than ever for me. I needed a reminder of why my priority will always be finding ways to cut our spending instead of increasing our income. I thought I’d share it with you, too.

When you’re working to save money or get out of debt, there are two main ways to do it: spend less and earn more. When you’re struggling to make ends meet, the solution is to cut your spending or find a way to increase your income or some balance of both.

I’ve always favored the spend less approach on my blog and in my life. I’m not a big fan of Dave Ramsey’s advice to go to extreme measures to increase your income. I’d rather work hard to cut spending than pick up a second job or extra hours to increase our income. Here’s why:

My time is worth more than money.

If we took on night jobs or weekend jobs, we could speed up our debt repayment and savings. But at what cost? We’d lose our only real quality time together, our only time to relax and recharge. As I said yesterday, frugality is about improving my quality of life. Working nonstop isn’t what I think about when I think about my best life.

Being short on time can cost money.

When you’re constantly rushing around, you’re more likely to cling to convenience. From picking up take out at the end of a night shift to paying more in childcare to cover your long hours to skipping money-saving habits like menu planning and coupon clipping because you don’t have time, rushing around can get expensive.

Higher income leads to more spending.

Obviously, the point of frugality is to avoid increasing expenses as income increases. But the harder you’re working to bring in that extra income, the harder it can be to tell yourself, “No.”

Even if you can avoid spending money on unnecessary things, there are some natural upgrades that come along with a better income: home ownership, vacations, little luxuries. If you put more of your focus on earning than saving, it’s likely that those little upgrades will add up to a lot of extra spending. By focusing on saving instead of earning, we’re living comfortably without being tempted to splurge to much. As our income naturally increases and we continue to spend less than we make, we’ll find a way to fit these upgrades into our budget.

What about you? Would you rather spend less or earn more?

What a savings account can buy

When I tell people we’re moving in 6 weeks, it always leads to the same conversation:

“Oh, so you found a job?”

“Nope. Not yet. But I’m looking.”

“So your husband found a job?”

“Not yet.”

That’s when they look at my like I’m nuts.

I don’t blame them. Back when I was living paycheck-to-paycheck, the idea of quitting my job without another one lined up would have seemed pretty nuts to me, too.

It’s not polite to ask specific questions about our financial situation, so most people leave it at that. They sort of raise their eyebrows like we’re nuts and assume we’ll be mooching off our parents for months while we job search. I don’t ever bother to correct them, even though their assumption isn’t really true.

Yes, we’ll be staying with Tony’s family temporarily, and it’s extremely kind of them to give us the chance to get settled in Indiana before we find an apartment. And yes, the absence of a rent payment from our budget for the few months that we stay there will help keep our savings account healthy. We won’t be mooching, though. We’ll be paying all of our own bills, chipping in for groceries, and helping out in any way we can to repay their kindness. But the truth is, we’re staying with them more out of convenience than financial necessity.

My husband is hoping to find a teaching job. Because the availability of teaching jobs depends so much on geography, we don’t want to lock ourselves into a certain area with a lease. We want to be open to move where ever the jobs are. Staying with family while we look makes the most sense.

Financially, though? We’re in a better place than we’ve ever been. Because we’ve been saving for the past three years, we have enough cash savings to carry us through a full year without any income. We won’t be living without income, though. We plan to earn money through part-time jobs or substitute teaching while my husband searches for a full-time teaching job. I also make a little bit of money from freelance writing and advertising on this site. That income will stretch our savings even further.

Obviously, the sooner we start earning income again, the better. I don’t want to completely wipe out our savings accounts while we search for jobs. I’m just not too stressed about the fact that neither of us has anything lined up yet. The sooner we find jobs, the more money we’ll be able to keep in our emergency fund and move to our house fund. For now, though, our savings has bought us peace of mind and the freedom to move closer to family despite the fact that the job market is sluggish, because we’re not dependent on our paychecks every week to live.

I doubt I’ll ever view our savings the same way again. Sometimes when I looked at that balance, I saw all of the things it could buy: a new car, a new computer, a million other things I wanted but didn’t need. It was tempting to spend at least some of it.

Now I see that the best thing a savings account can buy is freedom and peace of mind. We’re free to move closer to our families, free to be a little picky as we job search, and free to enjoy our vacation to Europe right before we settle into our new home. All of that is worth so much more to me than any material thing our savings account could buy.

Photo by alancleaver

Confession: I love my tax refund too much to correct my withholdings

No matter how much you know about money or how well you  manage yours, chances are there are things you do that you know are wrong, but can’t give up. For me, it’s overpaying taxes.

Here’s my confession: even though I’m married and file my taxes as a business due to various income sources, my tax withholdings are still set to the max.

I know it’s stupid. I know that my tax withholdings should be set so that I’m paying the right amount of taxes out of each check, owe nothing, and get no refund. I know that the smart thing to do is invest or save that extra money every week so I’m earning interest. I just can’t kick my tax refund habit, though.

The truth is, I don’t trust myself. Saving that money throughout the year takes a lot more discipline than letting the IRS hold on to it. Sure, my checks would be a little bigger every other week if my with holdings were set correctly, but an extra $200 a month can be frittered away so easily.

Earning interest requires putting every penny in the bank. That can be really difficult for someone like me who battles the evils of lifestyle inflation. I work hard to combat it, and for the most part I avoid major inflation, but when you’re living on a very tight income, it’s incredibly difficult not to add expenses as income increases. When that money comes in a lump sum, though, it’s a lot easier for me to commit it to savings or something purposeful.

We received our tax refund today, and it’s already been moved to savings to finish up our Europe fund and give us a pretty big head start on our moving fund.

I wish I had the self discipline to earn interest on that income all year, but in the end it would only add about $50 to my total. I know, $50 is better than nothing, but I can’t say I regret it. It’s unlikely I would save an additional $200 a month if my withholdings were set correctly. It would likely be spent on other things. Besides, nothing feels better than moving a big lump sum of money into savings and seeing my percentage increase overnight. Tax refunds are my personal finance guilty pleasure.

What about you? Do you like to get a refund every year, or do you set your withholdings correctly?

Photo by cbcastro

Where we’re going & how far we’ve come

Last week after I  mapped out financial goals for the next 3 years, I felt overwhelmed. Whenever I set a new goal, especially one as lofty as saving $20,000 for a house within three years, I go through a period where it feels impossible.

I have to remind myself of how far we’ve come. I remind myself where we were just three years ago — living paycheck-to-paycheck with an empty savings account.

I remember how I felt when I started this blog a year and a half ago. Simple goals like building an emergency fund, starting a retirement account, and saving for our move in three years on our meager income felt so far away. It might as well have been a million dollars.

I think back to last January when Tony and I started talking about our crazy plan to go to Europe. I wanted to make it happen, but I doubted whether we could save that much money in addition to our emergency fund and moving fund.

But step by step, dollar by dollar, we met our goals. We learned to spend less and save more without compromising our comfort. We learned that determination and good planning can make even the most difficult goals a reality.

When we finally completed our emergency fund and saved enough for Europe, I felt like I’d just finished my last final exam. I was relieved and proud. We’d come so far. That’s partly why I waited so long to set new goals. I wanted to revel a little — to feel like we’d finally made it — before starting over again.

It’s time to move on, though. There’s no finish line for frugality. There are always new challenges to overcome and new goals to accomplish. That’s part of the fun of it.

This is only the beginning, and we have a long way to go. With such a long road ahead of us, it helps to look back on how far we’ve come, and remind ourselves that each step is taking us closer to the next goal. Each time we hit a new landmark, we’ll be a little more stable, a little more settled, and a little more confident in our ability to get to the next one.

Photo by cdm

How a tight budget can be a blessing

Three years ago, we moved to North Carolina with a small nest egg but no real plans. Tony had a job waiting for him (an extremely low-paying teaching assistantship), but I spent three months looking for a full-time job in my field before I starting working part-time. We were frugal out of necessity. it’s scary to watch money leaving your account every month with no income. We didn’t know how to budget, though, and three months with no income depleted our savings pretty quickly.

Once I started working part-time, things were still extremely tight. During those 10 months, I learned most of what I know about finance out of necessity. Our limited income required that we prioritize our spending and avoid buying anything that wasn’t completely necessary. Frugality was easier then, because the temptation to spend wasn’t there. We were just trying to survive without getting behind on our bills.

Not only did we survive, but we paid off most of our credit card debt during that time. By the time I finally found a full-time job, though, our savings account was pretty much empty. We spent the next year and a half building it back up and saving for other goals.

Ever since our income increased, though, staying committed to frugality has become harder. Now that the need to plan and save isn’t quite so urgent, it’s tougher to make the right choices. Three years ago, if we overspent, we might not be able to pay our rent. These days, the consequences of overspending aren’t as concrete. It may mean that it takes us a little more time to buy a house or pay off our student loans, but we’re in no immediate danger.

Because of this mindset, I’m actually looking forward to hunkering down and going back into survivor mode after the move. I’m hoping that the months we spend searching for jobs will help us recommit to frugality, and once we’re finally in our own place building our savings again, we’ll have a renewed motivation to meet our goals quickly.

If you’re currently living in survivor mode, I have a little advice: Take advantage of this time without temptation and learn to be happy with what you have. Commit to this lifestyle now while temptation is low. As your income increases, don’t let your spending increase with it.

In my experience, tougher times can be a blessing. It’s a time to reflect on what’s really important in life, learn to be happy with less money, and develop habits that will help you save even more as your financial situation improves. As tight as I know things will be for us after the move, I’m looking forward to taking advantage of this opportunity to focus on our priorities.

Prioritizing our goals for the months ahead

Now that our emergency fund is complete, and we’re less than $1000 away from our goal to pay for our Europe trip in cash, I’m starting to think about what goals are next for us. Even though we’re unlikely to make much progress in the months ahead, it’s time to set our priorities and figure out where to start funneling our resources.

We have several goals for the next 3 years or so, but we’re still undecided on the order of things. Here’s a rough sketch:

Save $6,000 for moving expenses.

It will cost us under $1,000 to physically move our stuff. Tony’s family has generously offered us a place to stay while we get settled in and look for jobs, but we have several expenses that we’ll have to pay (health insurance, car insurance, cell phones, student loan payments, and groceries). We’ll need about $1,000 a month.

We’re hoping to find part-time jobs right away to extend our savings. My hope is that $5,000 plus whatever we make part-time will be enough to cover our expenses until we find jobs. Of course, in this economy, there’s no telling how long it could take. If we run out of “moving money” before we have jobs, that’s what our emergency fund is for. But I’m crossing my fingers that we won’t have to dip into that.

Our tax refund will give us quite a good start, and now that we’re done saving our emergency fund and Europe, we can devote all of our monthly savings to this goal, so saving this by May shouldn’t be a problem.

Buy a second car.

I know we’ll eventually need a second car. I want to wait until our current car is paid off before we begin shopping for a new one, but this will depend largely on our living situation once we move. If we’re both working on separate sides of town, it won’t be as easy as it is now for us to share a vehicle.

For now, we’re playing it by ear. Our car will be paid off in May 2011, and depending on our situation, we may need a second car sooner than that. So we’re starting to save now for a down payment at the very least, but if we have more time we might be able to pay cash.

Buy a house.

This is the big one, and it’s the goal that intimidates me most. I’m not against having a mortgage, especially if it’s a sensible one, but I’d like to save $20,000 in cash before we even consider buying a house. Saving that much money is a really tough commitment to make when I look at the cost of rent in the Indianapolis area, though. Considering our modest price range, it’s likely that a monthly mortgage payment would cost us less than rent.

Our plan is just to start saving, and then wait and see what our situation is. We may start doing some serious looking to figure out exactly what it would cost us, and if it makes sense to do it sooner, we may.

Pay off our student loans.

We still have a significant amount of student loan debt between the two of us. We’re currently paying them down slowly but surely, but eventually we plan to get much more aggressive to pay them off more quickly. At this point in our lives, though, I think security and stability is more important. I want to be debt free, but paying off those loans more quickly would eat up a huge percentage of our financial resources. So this goal remains on hold for now. It will likely wait until we’re settled homeowners.

I know that it’s unlikely that we’ll make much progress in the months ahead. Things are going to be very tight for us right after the move. We’ll be in survivor mode again, spending savings with no income, but we’re reasonably prepared. I can only hope that it will be very short time period before we’re able to start saving again.

I also have to remind myself that three years ago saving an emergency fund, moving halfway across the country, and paying cash for a trip to Europe seemed just as impossible. These are bigger goals, but we can achieve them if we stay focused.

Photo by alancleaver

Our emergency fund is complete!

emergency fundTake a look at the progress bars in my sidebar! We’ve completed our emergency fund in just about 15 months and it feels FANTASTIC! Over the past year, we’ve saved about 30% of our income. Not too bad, huh?

We weren’t projected to complete it until next month, but I went ahead and moved some of our Europe fund into our Emergency fund to finish it up. Now we can focus on funding one savings account.

Over the weekend, we stashed our emergency fund in an ING 12-month CD. The interest rate on our ING Direct savings account has been steadily dropping since we opened the account. We started with a 3% interest rate, and about 15 months later it’s down to 1.3% and still dropping. With the CD, we lock in a 2.1% interest rate for 12 months.

I know what you’re going to say. Isn’t the Emergency fund supposed to be liquid savings? Doesn’t a CD smack you with penalties for early withdrawal? Well, here’s the thing: The penalty for early withdrawal is 3 months of interest regardless of when we withdraw. So the penalty is the same if we withdraw tomorrow or 11 months from now. If we leave the money alone for 12 months, we’ll earn at least an additional $80 in interest. Worst case scenario, we have a catastrophe and we have to withdraw early. If that happens, we’ll lose a little of that extra interest.

Based on my calculations, 3 months of interest would equal about $20. So even if we withdraw early, we’ll still make about $60 more with the CD than our regular savings account (and that’s if our savings interest rate doesn’t continue to decrease, which is unlikely).

If we run into a little hiccup that requires us to move some money out of savings, we could always borrow from the Europe fund, which is still in a regular savings account, without any penalties.

The way I see it, if we have to withdraw from our CD a little early to cover our car insurance deductible, for instance, then so be it. We’ve really got nothing to lose. We’ll give up a little of that extra interest. So what? The money is still accessible in the event of an emergency, and we’re not technically losing money that we invested. Just interest, which would be fine with me if it was a true emergency.

Another reason we made the decision to open the CD is to protect our savings. Now that we’re banking primarily with ING, it’s a little too easy to move savings into our checking account. I wanted an added layer of deterrent for us to leave it alone now. There’s no way I’m giving up 3 months of interest just because I want to buy something.

This is our second milestone (the first was paying off all of our credit card debt), and it FEELS GREAT. When we first started our emergency fund, I felt so overwhelmed. Our budget was so tight, how could we manage to save such a large amount of money? But I have to tell you, it is so worth the scrimping. Since I opened our emergency fund, I’ve turned into a savings junkie. I love the feeling of looking at our account, and feeling secure in the knowledge that we can handle anything that life throws our way. It’s so empowering.

If you haven’t opened an emergency fund yet, why don’t to grab one of my referral links and get started? :)

Photo by endlessstudio