What if you could save money automatically?
What if you could save money everyday and not really see the impact to your daily cash flow? It’s possible with the automatic transfer approach. It works for me and it can work for you. The first step in the automatic transfer approach, which I call the streaming model, is creating additional bank savings accounts. A savings account titled for any specific items you want, bills that reoccur each year, or to prevent being broke at the worst of times by having a rainy-day fund. For example, I have the following accounts:
- Savings account labeled “Rainy Day”
- Savings account labeled “Car Insurance”
- Savings account labeled “Travel”
- Savings account labeled “Car Emergency”
Now, one might think it is ridiculous to have that many savings accounts, Why do it? I thought the same thing at first too. Regardless of the automatic transfer account, creating a rainy-day account should be your primary goal before you do any savings account expansions. You want to have about 3-6 months of your expenses saved up in case the worst happens. Once your rainy-day fund is built up, do not touch it. The automatic transfer approach is a great way to help you build up the rainy-day fund if you do not have one already.
Savings account expansion
Now you are set with building your rainy-day fund, let’s take another example of how to expand to other areas. I choose to pay car insurance in an annual lump sum or a 6-month lump sum to save $100 or $200 on your annual total cost. In order to do that, I have to plan for it months in advance. I created a car insurance savings account to do so. My planning consists of setting up an automatic transfer of $50/month. That will give me a nice base of $600 per year when it is time to pay the bills and will help my weekly cash flows not be largely impacted.
Similarly, if you value travel as a priority in your life, you can setup a travel account. I created a travel account and transfer $20 every Tuesday. This allows for an additional $1,040 a year for travel. And when you actually travel, you have a bank account to draw from that will not impact your regular cash flow. You can draw cash from this account for your travel and while out exploring, keep the money in your checking account untouched, ready for regular obligations.
Last, but not least, another idea would be a car emergency fund. If you drive a vehicle that has started to build miles on it, then you want to have a buffer saved up incase anything goes wrong on your vehicle. Based on my experience of vehicle issues outside of warranties, I have spent a couple of years building this account up to a threshold I felt is necessary. As your car gets older, you can change the threshold. I recently increased my “streaming” contributions to $75 every two weeks on Friday to get to my goal. Once you get there, you can eliminate it or reduce it.
The streaming model
The automatic transfer approach or streaming model may seem over the top. I thought it was too, but similarly to saving for retirement, you can focus on long term goals and challenge yourself by setting up automatic transfers to yourself. Think about your Apple or your Spotify monthly costs, you barely notice it. Even Netflix, although you barely watch any episodes, still shows up on your credit card statement every month. The automatic transfer model can help save towards goals, challenge yourself to avoid debt, and also create safe havens for yourself over time. Next time you log into your bank account, think about it.