Frugal Intuition

Disclaimer: Part of the blog platform that hosts this blog relies on ads.  So you’re going to see ads above here and to the side that may be for debt reduction or debt consolidation.  I know nothing about these companies and do not endorse them.

When I was a kid, maybe around 9 or 10, I remember my parents getting me one of those motorized banks where you put in the coins and it automatically sorted them for you into chambers for rolling.  This thing was pretty high tech back in the day.  I was fascinated by the process, so of course I kept picking up additional chores and working for coinage so I could put more into it (I have a funny story about my “rates” for another time).  What did I learn from this bank?  That all the pennies, nickels, dimes, and quarters really added up over time.  Giving a child a bank, be it fancy or a simple porcelain pig, is a great first step in teaching them to save.  Personally, I think it helps if it is the kind of bank that isn’t easy to get into.

The same principle holds true for adults.

This was a lesson that was really difficult for my husband to learn.  He grew up in a household where brand name foods were the norm.  Green beans were Del Monte.  Canned tomato sauce for chili–Hunt’s.  Ice cream–Breyers.  I grew up on store brand everything, and I certainly didn’t notice any difference.  On one trip to the store (before I stopped taking him with me), he picked up a brand name can of green beans.  I put them back and picked up the store brand for 15 cents cheaper.  “It’s 15 cents,” he said.  “Yep, it’s 15 cents, times the 4 cans a week we eat of green beans (green beans are one of the few vegetables he likes), times 52 weeks a year, and that’s over $30 a year saved on green beans.”

The little things add up.  

DH had never saved before me.  His paycheck used to burn a hole in his pocket every time.  He’s a classic example of someone brainwashed for our instant gratification society.   I tried for years to get him to set up a savings account, even if he only put in ten bucks a month.  He didn’t see the point of saving so little.

There’s this wonderful thing called compound interest.

Interest on a savings account is like free money.  Basically, you’re putting your money in the hands of a financial institution and allowing them to use it while you’re not (of course, if you need to withdraw it, they always allow you to do so).  In exchange, you earn interest on that money.  The best example I’ve ever heard for explaining compound interest is this one.  If, in his own time (think 1492, people) Christopher Columbus put one penny in a savings account earning interest at the rate of 6% and then instructed someone to take out the interest every year, the value of the interest earned by 2005 would be almost 31 cents.  But if he put that same penny into the same savings account with an annual interest rate of 6% and left the earned interest to compound — earning interest upon the interest — the resulting balance for 513 years would be $95,919,936,112. That’s $95 billion! (HowStuffWorks “A Dollar Saved…(or Invested)” )

The little things add up.

I encourage you to go and open a savings account today.  Now I don’t mean trotting down to your local branch and opening one up with them.  Why not?  Well, local banks usually don’t have the best interest rates.  You need to hop over to Bankrate to compare interest rates .  You’ll want to click on the one under “Savings” that says “MMA/Savings” (MMA is a money market account.  I’m going to explain those in a bit).  Next, choose your state, then choose the town/city nearest your location.  Then leave it set to the top option “MMA and savings account”

Now what you’re going to see is a big chart with a bunch of information on it.  There are 4 things I want you to pay attention to:

• The type (savings vs. money market)
• APY (Annual Percentage Yield–this will be slightly higher than the “Rate After Intro” and illustrates the compound interest concept)
• Open $ (how much is required to open an account with that institution)
• Monthly SVC Fees (service fees)

If you’re like we were, you don’t have a lot of money to open a savings account, so the very first thing I want you to do is click on “Open $” to sort by that field.  You’re looking at accounts that only take $1 to open.  $1.  That’s less than you spend on the super value menu at your favorite fast food place after tax.  Everybody can come up with a single dollar, so that excuse that you don’t have enough to open a savings account?  Not valid.

Next up, you want an account that has no monthly service fees.  On the particular screen I’m looking at, none of the institutions that require $1 opening balances charge fees.  This is good.  We get charged fees out the wazoo on every other service in the world.

Next, take a look at that APY–Annual Percentage Yield.  Okay, no brainer here–the higher this number is the better.  These numbers may not look like much.  Interest rates are down in the current economy (making Chris Columbus’ 6% look like a dream)–and that’s for loans AND savings (never for credit cards–but that’s another post).  I personally have had accounts with both HSBC Direct and ING Direct.  I started with ING, then moved over to HSBC because they had a slightly higher interest rate.  Both have given me excellent customer service, so I highly recommend both.

But there’s no branch of any of these institutions in my home town!

No worries.   These are on-line savings accounts.  Because they don’t have branches everywhere, it cuts down their overhead and that translates into additional savings for you.  You will be able to tie this account to any local bank to make transfers into it.  You want to be sure to pick an institution that is FDIC insured.  For those of you worried about identity theft, online banking with national institutions like HSBC and ING is safe.  They have numerous safeguards in place to make sure it’s really you.  Each has a bit of a lengthy sign up application, but they’ve got detailed instructions to help you out.

What about that money market thing?  

The simple explanation is that it is a savings account upon which checks can be written.  So it’s sort of like checking that earns interest but with limitations.  HowStuffWorks has a great article on how they work.  You’re certainly free to choose this option, but my personal advice (and I’m no banker) is to go with the savings.  It takes 3 days to transfer money to and from most online savings accounts.  Before you panic, that’s a good thing.  We want this money to be hard to get to so that you’re not tempted to dip into it for a whim.  We’re trying to develop an attitude that the money in this savings account is not to be touched except in cases of dire emergency.  ‘K?

I’ve got my shiny new savings account.  Now what?

Okay, whether you opened that new account with $1 or $100, the important thing to do is to add to it regularly.

But I owe more than I make!

You did not get into debt overnight, so you’re not going to get out of it either.  Debt is going to be a fixture in your life for a while.  Part of crawling out of The Pit is developing a contingency fund so that when emergencies occur like the dog needing to go to the vet or the car needing repairs, you have money set aside and don’t have to turn to credit cards or some kind of loan.

You can start small.  Presently, my husband and I get 4 paychecks a month (from our primary jobs–I get others from my other jobs but we’ll leave those out for now).  I get paid bimonthly, he gets paid every 2 weeks.  The moment that money is deposited into checking, I immediately transfer $25 from each check into savings.  That’s $100 a month, $1200 a year.  Maybe $25 is more than you can afford.  That’s fine too.  Start with $5 a check.  That’s a meal at a fast food place.  You can give that up–it’s bad for you anyway.

Let’s look at some other places you can find money to put into savings.

• Never tried store brand products before?  Start!  Pick a few things you normally buy brand name and buy the store brand.  Pretend you bought the store brand and bank the difference into savings.
• Stuck on brand name?  Use a coupon.  Bank the amount you saved using that coupon.
• Addicted to Starbucks?  Start making your coffee at home.  Figure out the difference between that daily shot of java from the coffee shop and making it yourself. Put that in the bank every week.
• If you use cash, always put your change from the end of the day into a jar.  You can eventually roll it and deposit it as well.  Remember, the little things add up.

There are loads of ways to find money to save, most of which involve analyzing and changing your habits.  The important thing is to make it a priority in your life.  Instead of waiting until you’ve paid all your bills to see what’s leftover, pick a set amount from each paycheck and put it into savings first.  You can even set up a recurring deposit to suck it out of checking and into savings before you even know it was there (though if your paycheck isn’t on direct deposit and you don’t balance your checkbook on a regular basis, you might want to avoid this).

I’ll be writing more about places to shave off expenses and bump up the amount you can save.  Stay tuned.

Trackback URI | Comments RSS