Dave and Katy’s Travels | An Investment, retirement, and travel blog

Well, I don’t post for almost a month, then I post twice in a single day.  Go figure.

I was just mentioning how so many things I’m finding are fluff, and then I found what I consider a diamond in the rough.  What’s funny is that the large value I just got wasn’t from the blog post itself (which was fine), but from one of the comments.

In this comment, the person describes their method of automatically saving money.  Now the conventional wisdom is the following:

1. Direct deposit funds into your checking account.
2. Automatically transfer out (or just have the direct deposit do it), a certain amount per month towards savings.
3. Increase this amount as necessary.

Now what the above method does is that it takes a variable amount (your real salary + bonus) and strips off a constant amount (your savings).  This is basically what I do with our finances, sending $300 per month towards our eTrade accounts.  This works “fine”.  However, when we get a bonus, or our salary increases, etc, I have to take an action in order to increase our savings amount.   If you’ve read any personal finance blog posts (such as all those fluff posts I recently mentioned), you’ll notice that you’re supposed to always save a large portion of your bonuses / raises.

I’ve always strongly believed that people (especially myself) will take the path of least resistance.  If something is automated it will likely happen.  If something is not automated, it will likely not happen.  So when I get a raise/bonus, it is likely I won’t increase our savings amount, and we will end up spending the money.

However, this comment with such a simple idea has struck me as a brilliant move.  Here’s the new steps:

1. Direct deposit into a high yield savings account (money market, e-savings, etc)
2. Transfer a set amount per month to your checking.
3. Live off of the checking amount.

This is so simple yet brilliant.  If you know you can live off of $1500 per month, just setup your e-savings account to transfer $1500 per month to your checking.  Now you can get raises, bonuses, etc, and your personal “salary” (money going into checking) will not change.  If you need to increase your “salary” due to inflation (or some other reason), you manually go into your automatic transfer settings on the website of your financial institution and change it.

Making this simple change has transferred the burden of least resistance towards spending less.  Now, if you’re lazy, you won’t increase your transfers.  Every time you get a raise or bonus, you will be saving that much more each month.  You will have to take a number of steps in order to reduce your savings levels, which makes it less likely to happen.

I’m going to look into doing this as soon as possible, and I’m pretty excited about the whole thing.