When I was 32, I thought I would have more money, being a smart, hardworking woman. But I had never made career choices based on money, so perhaps this was no surprise. Nevertheless, that year, I had all kinds of expenses thrown my way, which I paid for on my credit card, and had to spend the following painful year meticulously paying them off. On top of everything, I remember feeling embarrassed about my financial situation.
When I was 33, my mother and I decided to go get massages for her birthday. I had never been to a fancy spa before, and we got a package where we spent the whole day there, white robes, eating salads, the works. It was almost $300 - so much money! In the midst of all the heavenliness, I found myself thinking, "This is amazing. I want to do this again." Then I thought, "No, this is for people with a lot of money. I need to spend my money on other things."
And there, by the pool, while I was waiting for the spa lady to call me for my eucalyptus rejuvenating facial, I had my financial breakthrough moment and created a strategy that I have used for the last 15 years. I decided that if I wanted to go to a spa every year, I should just budget for it. Plain and simple. And I would get paid for doing it.
That week, I created several online savings accounts with various nicknames and automatic transfer schedules. The first account I called "Body and Beauty." The other accounts were much more ordinary-sounding: House (because I needed to start saving for a down payment); Honda3 (because I thought I'd get yet another Honda which didn't turn out to be the case); Retirement; Christmas and Gifts (because I always spend so much money on Christmas gifts, despite my entire family's annual vow to spend less, except on the kids); Travel; and Emergency. A few years ago, I added Home and Life Insurance.
Here's the "Before and After" of how I pay for things I need AND things I want.
Before: I want to go on a short ski trip, so I buy an airline ticket and reserve hotel on my credit card. I know I will be able to pay it off in about three months because my checking account is generally fine. Even if it takes four months to pay it off, it's not that much interest and I will not be in over my head. Plus, it's normal to go on some kind of vacation every year, and I'm doing something I can afford. Makes sense, right? I go on the vacation, and pay it off in three months. It costs the amount of the trip plus three months of interest. Notice that I only have a general sense of what I can afford and how long it will take to pay for it.
After: I automatically transfer $25 per week into my Travel account and in a year, I have $1300 plus interest. My friend says, let's go on that ski trip, and I can see on my phone how much money have available to spend RIGHT NOW SPECIFICALLY ON TRAVEL, which is $1300 plus a sprinkling of interest. We book our trip, I pay by credit card to rack up a few points and go on the trip. When my statement comes, I pay in full. The money comes from my Travel account, not my regular checking account which I use for day-to-day expenses. Notice that this time, I know exactly what I can afford, because I can pay for it today. If this is not how you pay for things now and you are on the "I'm-Pretty-Sure-I-Can-Afford-This Program", imagine for a moment what it would feel like to know you can afford it, right now.
Why you should start doing this today:
- Online savings accounts are free, and you can have as many as you would like - for practical things, like Emergency or Retirement, but also for fun things like Body and Beauty!
- Having the separate, named accounts is important, because it allows you to know what is available to spend on what. If I lumped everything together into one savings account, I might spend more money than I really should - and perhaps not save as much as I need to for other things, like retirement.
- Automatic transfers can be in any amount, including $5. It's more important to start a Retirement account and transfer $5 per week into it and increase the amount next year, or when you can, than to say you don't have any money for that. You do. You have $5 every week to get started. Then you have an active account which will just grow by itself.
- Once you see each account start growing, you will feel more confident in your ability to reach your financial goals.
- You will always know what you can afford, and instantly feel more in control of your money.
- If you have some kind of money emergency, you can stop the automatic transfers at any time, and schedule them to start again a month later, or whenever is practical. Always reschedule your start date for automatic transfers.
- If you typically pay by credit card, you will get double the benefits, because you'll get your points or other credit card benefits, but you will also have earned interest on your savings account that you are using to pay. If you charged $872 to your credit card, then transfer $872 from your online savings account. You will have money left over in your account that will continue to earn interest and give you a jump start on saving for the next time.
What is the catch, you may be asking? There isn't one. It works like a charm. There is, however, a lead-up time, while you are building up cash in those accounts. It will require you to delay your gratification for a period of time, and do things that are less expensive, for example. But while you are doing this, you are earning interest, and your accounts are growing all on their own.
Today, I own a home, have a healthy retirement account, and just bought airline tickets to Nepal. I have what I need and know what I can afford. I just looked my Mint app on my phone, and I have $409 in my Body and Beauty account! I think it's time for me to book a spa day for me and my mother - and use that money for something truly important.