2015 Savings System

Each year I make an effort to save a sufficient amount of capital.  I do this through a system I set up using direct deposit of my paycheck and marking funds in various accounts for a specific purpose.   Additionally, I am fairly frugal and don’t spend a lot money (in fact spending a lot of money causes anxiety for me).

However, I have a desire to save a little less in 2015 than in previous years, where I have wanted to save all that I could.

2015 System

Goals are best defined using the SMART framework, as described recently by Dividend Mantra. Feel free to step out and read about that, I will be right here.  I won’t be rehashing those details, because I hesitate to call my approach goal setting, plus he does a great job of explaining the framework. I hesitate because once my system has been set up, it is automatic and the result is also automatic.

I set the system up to run on it’s own, which is very inactive.  In order for it to change, I have to make an active adjustment.  That should not occur because I am setting up the system within my means, even the desire to spend more will be within my means (see below).

By the end of the year, the following will have occurred:

  • 401k Maxed (18000 this year, the IRS raised the limit from 17.5k)
  • Roth IRA Maxed (5500)
  • 600 per paycheck will be deposited in brokerage accounts for future investments
  • Remaining funds deposited into spending account, to do as I wish
    • This can include anything. Spending/Saving/Donations

Life could throw me a curve ball, which may require me to reduce some of the contributions above.  This has a chance of occurring (especially with the house), but I have an emergency fund that I think is sufficient to cover most things.

Reducing Spending Anxiety

It is hard for me to pay my credit card bills on each pay day (I charge as much as I can to my cards and pay them off as much as possible at each paycheck).  It doesn’t matter if I have spent more or less than I was supposed to, the act of parting with my earned money always hurts.

For a long time, I always worried about making purchases.  This was until I made the decision to “allow” myself an account to do whatever I wanted with. This account is all the spending (bills, food, etc) that I do.  This has reduced my anxiety because these funds aren’t for saving.  If I end up saving a little extra, I am pretty pleased by it.  In fact, many of my Loyal3 purchases last year were from funds I didn’t spend in this account.

A fun little side effect of this system, is that it allows me to figure out what I spent last year without much hassle:

26 * bi-weekly deposit – cash in account + credit card balance

*Edited after posting: I realize I am very fortunate to be in this position and hope I do not come off as insensitive.

Desire to spend more?

I am not feeling as frugal as I have in the past.  Partly due to the house purchase and my desire to make some improvements to it. I don’t really have anything in particular that I want to spend money on, I just feel like I want the penny pinching stress to go away for a bit.   How will I spend more while remaining within my means?

There really isn’t any secret to doing this, but when you make more money you can spend more (if you choose).  I am going to have a busy year at work and will make a little extra cash as a result.  This cash will be part of the “Remaining Funds” bullet above.  Of course, if a miracle happens and work is normal this year (which would be great), the extra funds won’t appear, but I won’t be over extended either.  Pretty straight forward.

Conclusion

That is how the system is going to be running this year.  The only potential change is if I choose to save more and then I would modify the amount going into the various brokerage accounts.  Otherwise, I expect this to remain in place until the end of the year.

 

My Savings System

After a long busy weekend of moving to my house, I am back on the internet!  I previously told my story so far. I am going to elaborate on my system for saving money.

My system for savings

I have been reading a lot about Systems vs Goals lately.  I first read about systems in How to Fail at Almost Everything and Still Win Big, written by Scott Adams. This book is about his many failures and what he did that eventually lead to his successes.  Basically, it boils down to setting up a series of steps that will eventually lead you to a better state. I try not to use the word “goal” because once a goal is reached you are done.  A good system will enable you to keep on advancing.  A system can be used to achieve goals, but the goal is almost incidental.  If that makes sense.

Spend less than you earn

The first thing that you will read in pretty much any financial independence book is to spend less than you earn.  This is what I have done since I left school.  In college I lived on what I had, which was just enough to pay bills and pay for necessities.  I had a little extra, but not much.  I don’t know how I did it, but the day I graduated college my bank account hit zero.

When I began working, I started to spend more.  I was able to do more and it happened, but I still spent less than what I earned.

Pay yourself first

My salary was larger than any amount of money I had earned before.  I started contributing to my 401k as soon as I began working.  This money never hit my bank account, so I never got used to having it.  I was saving money and it took me about 5 minutes to set up.  Effortless savings.  If your employer matches, that is free money.

My direct deposit hits multiple accounts.  I send money to my spending and various savings accounts.  When I get a bonus or work some overtime, I have designated my investment account for those deposits.  This account basically takes the remainder of the paycheck after each of the other accounts are funded.

Avoid lifestyle inflation

Lifestyle inflation is where you spend more as your income rises.  This is pretty easy to do without even thinking about it.  My system doesn’t allow this to happen, because when I get a raise my investment (overflow) account gets a larger deposit.  The amount going into my spending account is fixed.

Tracking what you spend

I don’t exactly track what I spend because I have an account that is for spending.  I am allowed to spend every dollar in that account.  This includes all my bills (car maintenance, cell, etc), food and anything else I want spend money on.  The money I don’t spend will go into a “to be spent” fund.  At the end of the year, it is easy to see how much I spent (i.e. total deposits – “to be spent” balance).

My goal is to keep this account to exactly what I spend.  I do not want the “to be spent” account to be overly full (usually just for plane tickets or if I want something and have to save up over a few checks).  Periodically, I will reduce the amount of money going into the spending account if I do not spend it all.  My spending has gone down over the last few years because I have everything that I want.

I have tried more complicated ways to track spending, but I usually only analyze how I have spent if I spend more than I was expecting.

Reduce fixed costs

What?  You just said you don’t track your spending!  I don’t, but I absolutely hate paying for things that I do not like.  I have an IPhone 3GS from 2009, I like the phone but hated the contract.  For years I looked for a service that met my needs, would let me use my current phone and was cheap.   I finally found a post on Mr. Money Mustache that talked about a company called Airvoice Wireless.  If you only text/call then check out that link.

I view the phone as a necessity.  I rarely do anything but make calls on it (I play games/listen to music on planes only).   Cable TV was another thing I could do without and cut the cord more than two years ago.  These changes saved me over $100 dollars a month, which enabled me to reduce my spending money (which automatically increased savings).

Forced withdrawals from savings

I love saving money, so how could I spend more money if I wanted to?  Well, I would be forced to remove money from my investment account.   This is an act I would have to do deliberately and feel the pain of seeing my available cash drop.

The other option is to change how much is going into that account.  This can be easily done in a minute, but then I would have to sit and wait longer to make my next investment.

Conclusion

This system works for me.  After setup, it requires very little to continue.  I feel good when I save and not as good when I spend.  It took a little tweaking but overtime I was able to simplify it.

 

What is your money saving system?