Awesome Conferences

Time and financial management

My new bank makes it easy to establish sub-accounts and set up automatic transfers between them. Today I created 3 new subaccounts:

  • "2021 House Repainting" ($100 transfered in each month)
  • "2016 New car" ($yyy transfered in each month)
  • "Annual unexpected household repair" ($zzz/month... every year we seem to have a $z,000 emergency; might as well plan for it)

I try to make my time management advice "friction free". That is, low effort, easy to get started. I try to do the same with my finances.

Any amount of difficulty (friction) can be used as an excuse to not do something. That's why TM4SA put so much emphasis on on my belief that any tool used for recording "todos" needs to be very quick to "jot something down". When you think of something for your todo list you want to be able to jot it down immediately. If you have to go through 3 menus before you can record something... it is easier to justify not recording it at all. "Oh it is such a pain to record that. I'll just remember it instead." As we all learn the hard way, todos that you try to memorize are todos that get forgotten.

Financial planning is similar. Once you have a strategy, you want it to be friction free. If people had to manually add money to their 401K or other retirement savings account, each payday, they wouldn't save much money. Because it is automatic, you can forget about it and years later find yourself with a lot of money set aside. Plan once, set it and forget it.

Which brings me to today's thought.

We're having our house repainted. Damn it is expensive! The previous owner did a crap job that would look good long enough to sell the house to us. We need a lot of carpentry, wood replacement, old paint removal, etc.

A good paint job should last 10 years. Therefore I've decided to put aside $100/month so that in 10 years we don't have to worry about whether or not we have the money. Yes, that's a long way away, but if I can set something up "friction free" now, I'll be glad I did later.

I used to use Quicken to do this kind of saving. However, Quicken doesn't put the money aside "for real", it kind of sets up a pleasant fiction. When I go to my ATM, I see the full balance. I need more of a "firewall".

(By the way... here's how I save for my next car. Suppose the monthly auto loan payment is $Y per month. Once the auto loan is paid off, set aside $Y/month. You are used to living without that money, so it isn't painful to save that much. The next time you need to buy a car you'll probably have most of the cash you need.)

So, Quicken is nice but I need something that will enforce the discipline a bit stronger.

I always thought it would be nice to set up an account for each thing I was saving for but my old, traditional, bank made that difficult. Each account had a minimum, the interest rate sucked until a higher minimum was reached, and so on. It is as if their software system was emulating the way banks worked last century where the overhead of each account was huge. (I won't name my old bank but they're one of the 5 being investigated for illegal activity](http://www.huffingtonpost.com/2011/05/16/foreclosure-fraud-audit-false-claims-actn862686.html)). They aren't buying a huge physical box to store my records. It's a 32-bit value (my balance) but some transaction history!

I was pleasantly surprised that my new bank (INGDirect) lets me open subaccounts with no minimums. Their software isn't tied to the past, it acknowledges that the overhead of putting my money in 50 subaccounts is about the same as if it was in one big account.

In less than 5 minutes I was able to set up the new accounts mentioned above and set up the monthly transfers to put my new strategy into effect. FIVE MINUTES!

I've eliminated the monthly friction by setting up these monthly transfers. Thankfully my bank has made this a lot easier.

I wish I had switched banks a long time ago.

Posted by Tom Limoncelli

No TrackBacks

TrackBack URL: http://everythingsysadmin.com/cgi-bin/mt-tb.cgi/1313

5 Comments | Leave a comment

What ING have actually done is worked in a different kind of friction - by allowing you to create your elaborate scheme of accounts and transfers, they make it much less likely that you'll switch banks even if their interest rate is below par. Competitor banks probably don't offer the multi-account & auto-transfer system, and even if they do you'd have to set it all up again.

That's not to say that your plan is a bad one, I also have an account with ING which I separate into multiple sub-accounts and I agree that it's a great system. But there is that downside worth keeping in mind.

For lack of personal restraint, you wind up exposing yourself to a huge financial risk. The main one, that is guaranteed, is that your money in those accounts will be eaten alive by inflation. The current inflation rate is around 3%. Unless you're getting over 3% interest on that money, it's losing value so you will wind up with LESS money in 10 years. This is quite a price to pay for "set and forget". You're better off finding a CD or even a bond with a better yield. Storing any amount of money in a savings account is almost always a bad idea. *

However, your point about friction definitely applies to many things, and is something I feel is far too frequently overlooked. In the US it seems we are taught that only the "broad strokes" really matter, but reality is far more subtle.

* I am not your financial adviser or even a financial professional. Please consult your own adviser. I assume no responsibility... blah blah blah.

Dear AItOawmNVYYSonND-MORqFbTtOpbCJd2JCcJKng,

For many Americans, inflation is more than sufficiently hedged by having massive mortgage debt. As long as you have a fixed rate mortgage, your mortgage payment will go down in real dollars as inflation goes up.

HAHA!! I was reading this post thinking "which Bank does this?" When you revealed that it was ING I was pleased because we already use ING for our shared checking! So, we'll have to check this out.

As far as the cost of inflation versus interest rates: since you're saving the money you'll need later rather than spending it, you end up "losing" less than you would have before. That is an improvement. If that isn't "good enough" then what you can do for these longer-term investments is roll them into CDs or bonds or whatever so you can squeeze every last penny.

But then you're talking opportunity costs: you move from splurging the paint budget on a nice dinner to having some friends come to your home for a nice dinner versus spending your evening evaluating prospectuses and squeezing every penny out of your portfolio.

Humanity is meant to live, and live in moderation. Death, taxes, inflation and mosquitoes are the price we pay . . .

-danny

Sure, with a known guaranteed 10-year timeframe, you'd do better to lock in with a CD ladder, I think ShareBuilder makes this really easy for you. You put your first year of deposits into a 10-year CD, the next year's worth in a 9-year (if there is such a thing), etc. Or you can keep some of it liquid. That's the main reason to keep money in savings, is that it's there with no penalties when you need it.

For saving for a new car, and you're not certain when your current car will crap out, you want to keep a large portion of it liquid, so a CD ladder might only be appropriate for a portion of the savings (or none at all.) It's all a matter of preference and self-knowledge, weighing the options and potential downsides of each.

Leave a comment