Q: I’ve noticed that you’re helping people out with saving for a down payment. I came up with an idea to help me start a savings plan that is apart from my 401(k), and it’s worked wonderfully.
By taking a look at my every day expenses, I tried to figure out a dollar amount that I needed to have in my account to cover my regular bills plus an extra few hundred dollars for unusual purchases or small emergencies.
I wanted to maintain this number every month in the account. Once I got to that point, everything extra was deemed “savings.” On payday, I had my check deposited to the account. Anything over the magic number was then transferred into a different savings account.
Having a credit union or bank that gave me internet access to my accounts made it easy to transfer over the extra balance each month.
I’ve found that watching my savings account balance grow as a result of these one-way transfers of cash has become a powerful motivator for saving. So even though I’m paying my bills first and myself second, I know that I’m (1) taking care of expenses and (2) spending less recklessly because I’ve become quite mindful (and fond) of the increasing balance in my once negligible savings.
Once the balance in my savings account is big enough, I’m going to switch the funds to an investment account so that the balance can grow even faster. I hope some of your readers find this suggestion useful.
A: I think your suggestion is grand, especially if you have the willpower to avoid dipping into the savings account for any reason. Congratulations on making a great start on saving above and beyond your 401(k).
When you decide to move your savings into a more active investment, consider investing in a cheap index fund. They’re easy to own, and you can continue to contribute to your index fund at any time. Best of all, you’ll do better than 85 percent of all managed mutual funds.
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