Wednesday, May 28, 2008

Not Robbing Peter to Pay Paul

One of the bad habits I have is using my savings account like some kind of financial Three Card Monte. What happens is this: each week I have $25 deposited into my savings from my checking. It is there for emergencies, like those scary months when the checks don't all clear, or a little extra cash when I am running low. I try to be diligent about putting money back in after I have taken it out... but I'm not. The net result is that the savings account should have $1,200 in it a year. How much does it actually have? $18.73.

Now, I know I have to have three kinds of savings: short, mid and long as well as a checking account to pay the bills. My long term savings is doing nicely. I have a 401K through work and am getting my employer match. My mid term savings is also doing fairly well. I have it in a online savings account with a decent interest rate and contribute to it regularly. I would like it to be larger, of course, but I am happy with its progress. It's the short term savings I have a problem with. The idea behind my short term savings is supposed to be that it is easily available cash I get my hands on in an emergency.

The problem is that I am way too loose with what constitutes an "emergency." If my checking account is starting to get low, say down near the day or two before payday, I feel obligated to take some money out and make sure I am covered. Then somehow, I manage to spend it. I always plan on putting it back in savings but somehow, even when I do automatic transfers, it just doesn't work. It is one of those ideas that is great on paper but doesn't work in reality.

Recently I got my "stimulus package" check. I could just put the $600 in my savings and say that I am that much closer to my goal. But for many reasons that doesn't work for me, most importantly because that won't solve my problem for July. What I want to do is create systems that will work each month that will help me make my goal and keep me out of debt - not hope for windfalls.

What seems more logical to me is to take $250 of it and put it in short term savings - and leave it there. The only time I will use it is a real emergency - say if a friend needs me to fly down to Guam and bust them out of prision.* I will have a hard and fast goal that there is always $250 in that account. No more moving things from one bucket to another... spilling half of it on the way. My budget calls for $100 of checking to go into savings. By funding savings with the windfall, the extra $100 can stay in checking and contribute to my goal!

I'll write more about how I am going to use the other part of the package in another post.

*You know who you are!

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