You may recall that the challenge for Day #11 of the January Money Diet was to earn some extra cash — at least $25. Today’s challenge is to take that extra money and open a savings account.
Even if you already have a savings account, you may wish to consider opening another one (or two). Read on:
How to Avoid a Credit Calamity
The first is having a large, unplanned expense.
For example, our main sewer line broke and I had to come up with $7400 within 24 hours to dig up our front yard and the street to replace the entire line. Isn’t that a crappy surprise?
Think of the vacation we might have enjoyed with $7400…First class tickets on the Orient Express! A stay in a suite at the Paris Ritz Carlton! Chocolate mousse and Champagne every night!
Which leads me to my second troublesome debt scenario — paying for travel with a credit card. Ten years ago I paid for a trip to France to attend a wedding, and put the entire vacation on my credit card. The trip was lovely, but then I was saddled for debt and interest for years after.
Saved By the Credit Union
We belong to a credit union that allows us to open as many accounts as we like at no charge. 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.
Because I’m such a big fan of credit unions, it felt like a natural fit when I approached YourMoneyFurther.com and the Open Your Eyes to a Credit Union campaign to see if they would be interested in sponsoring the January Money Diet.
Thanks to their support, this year we have cash prizes totaling $250 that I’ll be giving away next week to several lucky JMD participants. (Click here for the official giveaway rules.)
Having dedicated accounts at the credit union for different needs has worked well for us, and it might help you, too.
Here are my suggestions.
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 $1650, 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.
The important thing is to start now.
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 insurance company just started offering this service for the premiums on my term life insurance policy, so 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.
Step #4 – Make Savings 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.
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 just like banks and the FDIC, individual credit union deposits are protected up to $250,000 by the National Credit Union Administration.
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.
Open or Fund a New Account with at Least $25
Your challenge between now and January 31 is to take the money you earned earlier this month and open a savings account, or stash at least $25 in an existing 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. Set up automated savings if that’s an option.
Once you’ve accomplished this task, leave a comment over at the Money Diet Community Facebook Group so we can cheer for you!
If you have other systems for saving and managing unplanned expenses, we’d all LOVE to hear your strategies and thoughts.