Challenge #5 – Open a Savings Account

Open a savings account | January Money Diet

Dear friends,

During the January Money Diet we’re tackling 5 challenges to strengthen our relationship with money. In case you missed them, the other four challenges are:

Challenge #1 – Give 31 things away.

Challenge #2 – Figure your net worth.

Challenge #3 Do something to earn an extra $25 or more this month

Challenge #4 – Reduce one monthly expense

Your fifth challenge, should you choose to accept it, is to take the money you earned during Challenge #3 and open a savings account. Even if you already have a savings account, you may wish to consider opening another. Read on…

How a Savings Account Can Help You Avoid a Credit Calamity

There are two scenarios that have gotten me in trouble, debt-wise.

The first is having a large, unplanned expense. The worst example was when our main sewer line broke and I had to come up with $7400 to replace the line.

The second is paying for travel with a credit card.

We belong to a credit union that allows us to open as many accounts as we like at no charge. Having dedicated accounts for different needs has worked well for us, and it might help you, too.

First things first:

Step #1 – Open an Emergency Savings Account

The one certainty, for each of us, is that unplanned things will happen that cost money. We want to do extraordinary things with our money and live debt free, but to support those goals we each need an emergency savings account. Otherwise we’ll be scrambling, and risk losing the momentum we’ve worked so hard to build.

How much do you need to set aside? That will vary depending on your situation. Dave Ramsey recommends first establishing a $100 emergency account, and then building it to $1000. My health insurance annual deductible is $1950, so I need to account for that, too. Suze Orman recommends setting aside six months of income so that you can withstand a job loss, and that makes sense, too.

Step #2 – Open a Freedom Account

Our Freedom Account is where I stash a set amount of money each month for once-a-year expenses like insurance, taxes and HOA fees.

One tip – if you have large annual expenses, explore whether your vendor offers the option to pay monthly. My life insurance company just started offering this service, and now I have a small amount automatically deducted each month and no longer have a bigger annual bill.

Step #3 – Open a Vacation Account

Once you take this step, I think you’ll love having a dedicated vacation account. I began funding ours with $50 a month. What it meant was that when Southwest advertised airline tickets for $79, the money was already there and we could pounce on the deal. We saved about 10% by prepaying for our hotel and rental car from the Vacation Account, too. Then all I had to budget for was daily expenses. The result was zero credit card debt after our last trip.

Make It Inconvenient

The credit union where we keep our savings accounts is not connected to my regular bank, and I don’t have a checking account there. I declined the free debit card they offered me. When I want to withdraw money, I have to drive over there and talk with a human to get it.

This is an important key for me! While my regular bank offers a savings account connected to my checking account, it’s too convenient to transfer the funds electronically and therefore the money never really accumulates. Having an inconvenient savings account makes it tougher to get the money out, and I need that.

Some may argue that savings accounts pay pitifully small interest rates, and while this is true it doesn’t matter much if you’re just saving a few thousand dollars for short-term use. As your balance grows, you can transfer the money away to another inconvenient place that pays a higher interest rate.

Safe and Sound

The credit union’s interest rates are a little better than the bank’s, but the real appeal for me is that the account is FDIC-insured and the principal is not affected by the economy or market fluctuations.

The credit union doesn’t charge monthly fees, and the nice folks there will happily open as many savings accounts as I like with a $25 minimum balance.

Both of my children have learned about saving money with their credit union accounts, and the credit union gave my daughter her first car loan when she was 16.

For simple, short-term savings, I’m a big fan of the credit union. If you’re interested in joining a credit union, you can learn more and find one at MyCreditUnion.gov.

Make It Automatic

When I worked for the publishing company, I arranged to have a set amount withdrawn from each paycheck and sent directly to a savings account. If your company offers this benefit, I highly recommend it as a painless way to build real wealth. If it seems impossible, start with a small amount. You’ll love seeing that balance grow, and with time you’ll be able to increase the amount.

I started having just $25 withdrawn from each bimonthly paycheck, which added up to $600 a year. I eventually eased that up to $50 a paycheck after my next raise, and then $100, until eventually I was having $200 a check sent to my savings account — which added up to a nice $4800 a year. The funny thing is, I really didn’t miss the money — as long as it didn’t have a chance to pass through my fingers.

Now that I’m self-employed, I budget for savings each month and pay the amount just like a bill. It takes a little more self discipline, so having an inconvenient place to stash the savings really helps.

Challenge #5 – Open or Fund a New Account with at Least $25

Your challenge between now and January 31, if you choose to accept it, is to take the money you earned during Challenge #3 and open a savings account in a place where you can’t easily transfer the money back to your main account. If you don’t currently have an emergency account, you may wish to earmark the fund for unplanned expenses. If you do have a funded emergency account, you may wish to set up an account for another purpose. And if you have all the accounts you need, deposit at least $25 this month.

Remember, everyone who completes all five challenges will be entered to win a special prize at the end of the month.

Once you’ve accomplished this task, leave a comment on this page so we can cheer for you!

If you already have an inconvenient savings account, or another system for managing unplanned expenses, we’d all LOVE to hear your strategies and thoughts.

Hugs,

The signature for Eliza Cross

About Eliza Cross

Eliza Cross is a full-time writer and the author of a dozen books about food and home design. She has been blogging about simplicity and sustainable living since 2006.

15 comments to Challenge #5 – Open a Savings Account

  • kruidigmeisje

    I have never in my life not had a savings account.
    In NL (where I life) lots of parents and/or grandparents open one when you are born. With special bonus too. And I had a piggy bank where I put in some of my earnings and pocketmoney.
    The american way of living, accumulating debt as easily as buys clothes, is really foreign and weird for me. I have only ever lend money for a house. Not for a car, not for a lawyer, not for a holiday, and not for christmas. For me that concept is challenging: when you cannot afford that, you have a state option, or you do without. (living without a car is possible here). Some of my countrymen do borrow, but the concept of paying back is ingrained in our culture.
    So I am a bit confused about this assignment. I did close some savings accounts last year: I had too many to easily oversee it. I even came across an account I didnt even know I had, with several months of salary on it. Usefull, we moved and did a renovation of the new home last year.
    Good luck for everybody who finds the freedom and joy of a life with less or no debt! I sincerely hope that to be a lot of people around the world.

  • Catherine Godfrey

    Opened last Friday & having 10% direct deposited from my employer

  • Nancy

    I have a savings account but I figured out a specific amount of money to deposit in my savings account each month. Last year I put in random amounts. Now I will be more consistent.
    Have been spreading the word about the January Money Diet.

  • Melissa

    Savings is set up with several buckets for upcoming college tuition, annual bills, vacation, etc. Added money in January to stay on track.

  • Lyn

    We’ve got a special savings account, which we send money to each month. This last year, though, we tapped into it to pay other expenses. Ut oh. So I am now taking the money we are saving from not paying our housekeeper and putting that into that special account. It now happens automatically before I ever see the cash. Yay!!

  • Annette

    I opened a savings account when I did the January money diet last year. Thank you so much for suggesting this. I have a set amount come out of my back account every payday. Some of it goes to my savings account and another amount to investments. It’s amazing how quickly it adds up! The best thing about it is that I don’t have to do anything as my bank does it automatically for me. I have learned to live on slightly less and delight in watching my savings grow every month.

  • Sara

    I have a number of accounts, maybe a tad too many. One for retirement, I call it flamenco in Salamca by 70, two for vacation, one for financial freedoom, and two for my niece. I made an additional deposit in my retirement account and bought bonds in a global index fund with a ethical profile.

  • During last year’s challenge I opened a savings account, and taking your advice I made it inconvenient to withdraw from. But it’s also inconvenient to deposit into. That’s my task now: to make that automatic.

  • Judy

    I deposited the $102.75 earned by selling 4 items on Ebay into my savings account. I opened a new savings account at a credit union in town last year as a result of reading your blog last January. I do not have a checking account at the credit union and need to drive to the credit union to withdraw money. I have 1 account with 3 divisions. Each has a name: Regular (or emergency), FUN and Escrow (annual expenses). This has worked wonderfully for me! I routinely fund the Escrow account so I’m prepared to pay those annual or quarterly payments. I use monies from the FUN account when we go on short vacations or other extras. Thank you for the encouragement!

  • Colette

    I have all of the accounts that I need, so I’ll deposit $25 extra in one. The credit union here is great, and the only place a deal with. On a different note, I’m really “old school”, so when my backyard hens started laying eggs 2 years ago, I decided to save all of my customer “egg” money in an antique jar. I have never spent a penny of it, and it is now over $600! For a variety of reasons, I think it is very important to have cash on hand that is not held in a bank or financial institution.

  • Susan Trimble

    Opened a savings account at my bank that will be for travel. I have relatives in the US that I want to see and also would like to see other countries.

    I have been leery about opening an account on the internet, but if I knew which ones I could really trust would be open to this.

  • I remember back when savings accounts were all the rage because they actually paid meaningful interest. Ah, memories 🙂

  • Glenda

    I opened up a credit union savings account and the credit union is across town so I have to make a special trip to withdraw or add to my funds. I also have started collecting the one dollar bills that I get in change and plan to deposit them whenever I have saved $50. Since I am now shopping with cash only I have a reliable way to save some money.

  • Steve

    Through my online banking I have virtual “buckets” set up in a reserve account. Each bucket represents a yearly expense (Christmas, travel, etc.). I move a lump sum into the account each month on payday, then distribute it among the buckets. Each bucket has a bar graph that represents my progress toward the goal amount I’ve set for that bucket.

  • Donna

    I opened a SmartyPig account and have been depositing $25.00 per week!! I am so excited!!

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