Automation: Add a “Stupid Mistakes” sub-savings account

59 Comments

17 27 0

Let me show you how I handle stupid mistakes like traffic tickets in my automation system for personal finances.

 

One of the most common reasons people can’t get ahead is expenses they just didn’t expect. I constantly hear things like this:

  • “I was just about to pay off my credit card debt FOREVER, and then I had to get a new ___ for my ___”
  • “God, I didn’t expect to get that traffic ticket.”
  • “Every time I think I’m getting ahead, my car breaks down or I have to replace some appliance.”

These “unpredictable” expenses are very predictable

Here’s the trick: A lot of what seems unpredictable is extremely predictable — over the long term. What seems like surprise expenses is actually not a surprise if you analyze your spending for the past 5 years. Which of course nobody does.

For example, that “surprise” car repair? It might not happen in the same month, but every year, you might average spending about $400 on car repair. That’s $33/month. Once you know that, set up an automatic deposit into your sub-savings account and you’re done.

Keep a “Stupid Mistakes” sub-savings account

I keep a sub-savings account called “Stupid Mistakes” in my Capital One 360 (formerly ING Direct) account.

 

I’ll explain some of the other ones later

What I use “Stupid Mistakes” for:

  • Traffic tickets
  • Late fees or penalties that I can’t negotiate out of
  • Re-buying things that I lost

I save $100/month into it. If there’s anything left at the end of the year, I take out 20% to reward myself, and roll the rest back into my main savings account.

Keep a “Stupid Mistakes” sub-savings account. Just the simple fact of having one will sharpen your focus on avoiding the mistakes in the first place. And when you do make a stupid mistake, you’ll be able to use your sub-savings account as a buffer to keep your automation system on track.

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17 27 0

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59 Comments

17 27 0
 
  1. Thanks for the post!

    I read this in the book but what I now understand it the part about rewarding yourself at the end of the year. Never thought about it!

  2. “I save $100/month into it. If there’s anything left at the end of the year, I take out 20% to reward myself, and roll the rest back into my main savings account.”

    Does this mean that come Jan your Stupid mistakes fund is empty?

  3. I love using ING for these types of sub-accounts. My ING dashboard looks very similar to yours. I have a house repair fund, a vacation fund, tax fund, emergency fund, and general savings fund. The ability to create these sub-accounts is probably my favorite feature of ING.

  4. Isn’t this a new name for the emergency fund?

  5. I used to use sub savings accounts but they didn’t work as I expected. I had a great system where every month I rationed my savings into sub-accounts based on percentages. However, due to transferring between accounts I got a threatening letter from ING saying that if I transferred more than 6 times in a month it was considered money laundering and if it happened 3 months in a row they’d close my account.

    So, the system is still great in theory, but be careful about how you implement it. I use the same system now, I just track it from one account in an Excel spreadsheet.

  6. I’m with TheDebtHawk.com. I have something like 10-12 ING subaccounts for various things. It is also one of my favorite features. Since I’m a bit OCD about my savings, this allows me to easily break things out into specific accounts and therefore specific goals.

  7. @Sean. I ran into the same issue, but with a little restructuring you can eliminate some of the pain. Rather than move a bunch of money into one ING account and then transfer from there to all of the others, set up the transfers to pull from an external account into each sub-savings account individually. That was my biggest source of transfers, and now I don’t come close to the limit.

  8. I like what you say about “unpredictable” things being predictable. We don’t always know what’s going to happen but we know something will. As you said, with sufficient historical data we can usually know in advance the likelihood of future “surprise” expenses.

    That’s how insurance companies operate. In a way we’re simply starting a very small (one customer) insurance company for ourselves. By anticipating the likely losses and spreading it out over time it becomes a controllable expense.

    I would not stop at the end of the year and empty the account but leave the balance there and stop paying into it. It would be there as an emergency fund but you wouldn’t have the monthly expense.

  9. These are great ideas; instead of subaccounts with ING; I use the Freedom Account spreadsheet by Mary Hunt; it’s the same thing using the ING on paper instead; with 10 subaccounts. Just type in “freedom account mary hunt” and you will find the spreadsheet ready for download. Really easy to use.

  10. @Sean, @Brian Ramsay. These aren’t really sub-savings accounts, each is a different savings account with a unique account #. As long as you don’t transfer money to one of these accounts more than 6 times a month you won’t receive the nasty letter.

  11. You can also use a similar strategy for warranties. They’re basically equivalent to gambling, especially in that the house always wins in the end. So instead of buying a warranty, instead put the same amount into a subaccount. After a few such purchases, your account will be big enough to basically self-warranty when something actually breaks down. And you still get the interest! And the warranty lasts forever!

  12. LOL – the first thing that crossed my mind was ‘how many traffic tickets do you get?’ Maybe it’s time to try public transportation :)

    But it’s a good way to save a little extra, whatever one’s ‘oops’ may look like.

  13. “One-person insurance company”!
    Thanks, Siddhartha, for that phrase. It’s great!

    As with insurance, a Stupid Mistakes account is more necessary when you are young, have less income, and you need the discipline to keep from getting into debt. It is also the time that parents are sometimes asked upon to help out with Stupid Mistakes. They are, for some, the Stupid Mistakes fund (!)

    I find the same with life insurance. Had I thought of it when younger, I might have gotten only term insurance, and less at that, and socked the rest of the premiums away into one-person insurance funds, like Stupid Mistakes.

  14. Are you serious? Saving is hard for many people. Setting up 5 subaccounts is too much effort and complicates what you need to manage.

    Save in an emergency fund – 12-24 months of true, no cutbacks, living expenses. Let’s say you need $1500/month to eat, rent, car, utilities, shoes, clothes, GF expenses, cable, ISP, etc … that means you need to put $50-$1000 per month into an emergency fund until you’ve saved $18,000. Just $50/month will take 30 years, so I hope you can save more, but you need to GET STARTED ASAP.

    Now you don’t have to worry that a new transmission will kill your finances. Shoes, clothes, and a new cell phone ARE NOT EMERGENCIES.

    When you get a raise, 50% of that extra money goes into your emergency fund savings, until it is full.

    When you’re done saving for the emergency fund, you ought to be saving for retirement – 10-20% of every penny you make. 10% if you are under 30. The more you save, the quicker you can say goodbye to working for someone else. If your living expenses go up, then the amount in your “emergency fund” needs to go up too.

    It goes without saying that you should not have any car or credit card debt. No vehicle loan should be more than 3 yrs, if you have a loan at all. Just because someone will loan you the money, doesn’t mean you should take it.

    I know this advice isn’t popular. Get over it. You aren’t gonna “be rich” if you can’t save $18,000 for an emergency fund. BTW, most families need more than $1500/month, so if you plan on being married and kids, double that amount.

    Where’s your “I got fired today emergency fund?” That’s more important than a “wedding fund” unless you are independently wealthy and don’t need to work.

    • JohnP: That is actually my “Ramit’s Savings Account,” which I agree is important. Keep in mind this advice augments an emergency fund.

      But contrary to what you said, dividing your savings goals into sub-savings accounts is extremely effective. Instead of having a large lump sum sitting in one account — which is easy to tap into when your friends say, “Hey, let’s go to Vegas” — if you have an account clearly labeled for a “House Down Payment,” you’ll think twice. That’s using barriers to prevent yourself from spending.

  15. @JohnP – I don’t believe Ramit is talking about an emergency fund like you are. Ramit is talking about those small unexpected “Stupid” expenses that throw you off a little bit, not life altering changes like a job loss or major medical bills.

    Ramit is trying to avoid the 1 step back after the 2 steps forward so to speak.

  16. @Sean

    I had the same issue. Then, I opened up an Electric Orange checking account with ING and had my paycheck deposited there. After that, I set up automated transfers to my various sub-accounts. The reason why 6 transfers from a savings account is not allowed is not because of money laundering; it is because these accounts are regulated as savings accounts and therefore the regulations says that no more than 6 transfers can occur in a month. As for why 6, I have no idea. And if it is to prevent money laundering, why couldn’t you just do the money laundering through a checking account instead? Also, this is a regulation that applies to all regular savings accounts and not just to ING.

  17. @eric

    You are incorrect. You can deposit as many times as you want into a savings account. You can’t WITHDRAW from a savings account more than 6 times a month.

    @Justin

    That’s a pretty cool idea. I may actually start implementing that at some point.

  18. “I was just about to pay off my credit card debt FOREVER, and then I had to get a new ___ for my ___”

    I’m in this situation this very moment. My water heater is leaking. Water covers about 1/3 of my garage floor. It’s really old and not covered by the warranty any more. I’m looking at around $600 bucks to get it replaced.

    I’ve been aggressively paying off my credit card debt, using about 90% of the money I make freelancing to go straight to the cards. I’ve put a moratorium on buying anything besides food for myself, cut down and canceled subscriptions, etc… basically following lots of Ramit’s advice on saving money.

    But now, instead of making a 10% payment on the debt this month, I have to buy a new water heater. To pay off the debt quickly, I’ve been forgoing non-retirement saving (I’m still contributing to my 403b with employer-matching)…

    So should I consider slowing my debt repayment so that I can get more cash in the bank for this kind of thing? My original plan was to pay off the cards asap (interest is about $40 a month right now…), and then start putting that money in savings to build up a reserve. My job is secure, and my freelance work is relatively steady, so I’m not terribly concerned about low cash reserves right now, but this kind of thing is really frustrating…

    I guess it’s not too bad since I have the cash to pay for it and won’t be going further into debt, but it’s still annoying that it means that much longer until I pay off the damn card…

  19. My husband calls this sub-category “Idiot Tax.” Car repairs go elsewhere.

  20. This is a great idea! What better way to do it than to automate monthly payments. We’re a big fan of planning for the worse. A lot of us can be overly optimistic and fail to plan for those unexpected expenses. This is a reminder for all to keep their money in check before it checks you.

    Haiti’s earthquake and Iceland’s volcanic eruption are reminders that we never know what’s around the corner, especially with nature. Better to plan than be caught off guard.

  21. Regarding the 6 transactions questions, I believe it has to do with how much banks are required to hold in reserve for balances in checking with (theoretically) unlimited transactions, versus balances in savings accounts. And we’ve done exactly what JasterMereel did and set up an Electric Orange account as a “front” for our savings sub-accounts.

  22. I understand the psychological factor here, and I don’t think this is a bad idea. However, I have personally always had the philosophy that you should be putting every penny you can into your “general” savings account as possible. If something unexpected comes up such as a speeding ticket, broken furnace, etc, then it comes out of my general savings account. If I employ the method above, I will theoretically have less money because of the 20% “reward” at the end of the year. I say, stack as much savings as you can into one account. If you need it, take it. Don’t touch it for anything you don’t need. Although the word “need” is awfully subjective.

  23. I love posts like this. This won’t work for everyone as written but the concept is sound.

    I do something really weird with my ING sub accounts. I have several general kinds of savings and I subdivide them further on a spreadsheet. It’s just mental accounting really, I could do it all in one, but I like the “at a glance” phenomenon, plus I do take a planned withdrawal from four of the accounts once a month so this keeps me from getting in trouble with the six withdrawal rule.

    I mostly use ING for stuff I know I’m going to have to pay for in the next year or so. My big bad emergency fund is in I bonds, as I’m hoping one day to have a lot more in that fund and I want the planning options I bonds offer.

  24. The oops-account is really a great idea. I do agree that it will keep you more focused and aware of trying to avoid oops-incidents. If I know I only have so many dollars as a non-emergency buffer then I will try to avoid stupid mistakes. If I’m still careless then those dollars have to come out of one of the other accounts hindering reaching those goals. It makes you pay more attention to what’s going on is all. If you are constantly pulling out of a general account sure you’ll save money but it will not be efficient.

  25. Hey Ramit – to consolidate space, you can combine “Wedding” and “Stupid mistakes” into one category. ;-)

    Kidding, of course… !

  26. I guess my thought with just using a general savings account is that you really shouldn’t be “constantly” pulling money out of it. I personally have 4 savings accounts. 1 for each of my 2 children. 1 savings account to stash money away for yearly expenses like taxes, planned vacations, planned vehicle expenses, etc. The other account is my nest egg. I don’t touch that one more than once per year. The main difference is that I don’t have an “oops” account. I stash that money in my regular savings account. I know that everyone’s brains work differently, but this works for me. I’m happy if everyone can find a way to save a little bit. It’s hard to do!

  27. I love this method of saving. I have a few sub accounts and it does make a difference. To me it is as important as having different sections in a bookstore. In the grand scheme of things I guess it pays to study hard to find a system that works.

  28. @JohnP:

    “Save in an emergency fund – 12-24 months of true, no cutbacks, living expenses.”

    I think 2 years of full expenses is a little much.

    “I know this advice isn’t popular. Get over it. BTW, most families need more than $1500/month, so if you plan on being married and kids, double that amount.”

    John, you could QUADRUPLE that amount, and it would still be less than my wife’s and my monthly budget, and we don’t even have kids! 24 months of “true, no cutbacks living expenses” for us would be over $200,000.

    Are you saying it’s reasonable to have $200,000 in cash, just sitting in a bank account earning no interest? I disagree. For one thing, it’s extremely unlikely that we would ever be completely without any income whatsoever for 2 YEARS. That’s just paranoid. It’s reasonable to expect that every few years, one of us might be unemployed for 3-6 months, but I think it’s silly to plan for both of us to be unemployed for 2 years. Secondly, having that money sitting there earning no interest is wasteful. Thirdly, it would take us 6 years of focused savings to reach that goal. We’d lose out on valuable compounding time in our retirement savings.

    I think you’re speaking from the point of view of someone fresh out of school, with little life experience. You used an example of $1,500 for total monthly expenses. That’s actually extremely low. Maybe for you, $1500/month living expenses probably seems reasonable. For someone fresh out of school, with low living expenses and an unpredictable employment outlook, maybe 2 years’ of living expenses seems reasonable (particularly when it only amounts to $36,000). But when you tell us that you know your advice “isn’t popular,” but that we should just “get over it,” it comes across as a tad presumptuous.

    My target is 3 months’ worth of living expenses. That would be $25,000. That’s more than enough. There aren’t many problems that can’t be fixed with $25,000 in cash. I think 3 months is enough for anybody. Everything above and beyond that should go toward paying off debt and building retirement savings.

  29. @Kevin and @JohnP,

    Both of you need to relax a bit. Saving for an e-fund and retirement is an intensely personal choice and there are many different “right” answers. Basically, it comes down to the individual and whatever helps them sleep at night. If JohnP wants 24 months of expenses to help him sleep better at night, then so be it. If Kevin wants 3 months of expenses to help him sleep at night, then so be it. Neither of them is wrong because each choice is tailored to the individual.

    I will say that I think 3 months of expenses, for the average American, is actually pretty low. And I say that coming from first hand experience of being unemployed for 13 months. And what kind of savings account do you have where you are earning 0% interest? Even at an appallingly low 0.15% interest rate, you’ll making $300/yr and there are plentiful options for rates of 1% or more which yields $2000/yr or more on $200,000 deposit.

  30. @JasterMereel:

    2 things:

    1. I think the correct “number” of months you should have in emergency savings probably depends largely on whether or not you are single or married. If you’re single and lose your job, you have no cushion, so I can see the need for a larger emergency fund. However, if you’re married and lose your job, your household income has only dropped by half. After cutting back on some expenses, and accounting for employment insurance, your “3 months” of full expenses can actually last quite a bit longer than 3 months. For one thing, if it really is 3 months of FULL expenses, and you’ve only lost HALF your household income, then it automatically will last you at least 6 months, right? After accounting for employment insurance and cost-cutting, you should easily be fine for at least 8 months. I’m married, so that’s where I was coming from on that point.

    2. Regarding having such a huge sum tied up in a low-interest savings account. You’re right that if I could find a 1% savings account, I could earn $2,000/year on that. However, that’s subject to income tax. In Canada, interest income is one of the worst kind of incomes – it’s fully taxable at your marginal rate. So I’d lose about 1/3 of it right off the top. I’d much rather sock that money in a tax-sheltered retirement account and earn 5-6% ($10,000 – $12,000) tax-deferred.

  31. well it is good that people are advocating that elders must have insurance the most

  32. @JohnP, It’s NOT obvious that you shouldn’t have any car debt. If someone will loan you money at 0%, damn right you should take it, and hold on to it as long as possible!

  33. You can earn a full 1% APY more using SmartyPig (http://smartypig.com) over ING…plus the support is phenomenal and the service can be social & easy to use. I’m surprised Ramit doesn’t talk about it more.

  34. Love this idea! I’m starting this sub-account today. I have “traffic ticket” stupid mistakes I still need to pay off.

  35. I think Ramit’s idea of setting up sub-savings-account for “stupid mistakes” is a great way to avoid getting too cocky. (About Jim’s water heater: Life span of water heaters – about 10 years. Might get lucky and do better – or maybe not. It turns out that MY water heater is 10 years old. I’ve been fantasy shopping for water heaters. So glamorous!)

  36. I want more tips, ideas and thoughts on making more money & getting rich.

    Saving 100 bucks is the opposite mindframe.

    • Yohami: “I want more tips, ideas and thoughts on making more money & getting rich.”

      Sign up at http://www.earn1k.com, my course on earning more money on the side.

      My pioneer class of students has earned so much money on the side, including a woman, Jackie S., who closed $30,000 in 8 weeks, and Dean, who got a $2,800 check with a $1,700/month retainer.

  37. @ #35 Paul

    He has written about why it’s a waste of time to chase bank rates and encourages you to find a service you like and stick with it(endorsing ING because he uses it). Also, check his posts about debating minutiae and the 85% solution for additional reasons.

    Or even his post last year about the same exact topic…? I’m onto you Ramit.

  38. @Ilene Frank
    Once we got the water heater out, it looks like it was probably 12 to 15 years old… parts of it were crumbling in my hands! And this morning, I had the best shower I’ve ever had in this house… I think I was way overdue for a new water heater… even before it started leaking… plus I’m sure the new water heater is way more efficient… so hopefully I’ll see some savings on my gas bill…

    And since I posted the other day, I’ve had an old client become a current client again (with potentially lots of work…), booked a project that will pay for the water heater, and possibly brought on a roommate who would cover a little more than 1/3 of my mortgage and property taxes.

    I’m feeling much better about my financial situation now. :-)

  39. [...] Automation: Add a "Stupid Mistakes" sub-savings account | I Will Teach You To Be Rich (tags: money readlater saving) [...]

  40. I set up a third ING sub account with a $1 called “Trip to Europe with Kids.” The next week I received a totally unexpected $5000 check.

    Build it, and they will come.

  41. Great tips Ramit. I first heard about this site on a pick-up podcast interview with AJ & Jordan Harbinger. Good stuff.

  42. This is a great program, i wish my bank had something similar. it definitely makes it easier to keep track of longterm projects that you want to save for. keep up the good work

  43. I think i’m gonna try this out.

  44. Ramit,

    Thanks for sharing, this is the first time that I have heard about sub-accounts.

  45. I’ve heard great things about ING, but I’m sticking with Ally. They have the same ability to create different accounts with different names all viewable on the same page.

    Overall though, I love the sub-accounts! Even if they’re not technically “sub”.

  46. Really great and simple tip this one. I feel like with a lot of these things it’s a very simple thing to do its just difficult emotionally.

  47. Hey Ramit, you should verify your email account with ING.. it says it is unverified according to that screenshot. ;)

  48. Nice article. Your analysis of human behaviour is very much exact. nice.

  49. Very well done.

    Douglas good one.

  50. I’m more curious about the “Spend to Save” account. “Save to Spend” makes sense, but I’d like to learn how to Spend to Save!

  51. Why not just call it an emergency fund?

  52. We should apply this same sort of logic to health care and force people to buy HSAs.

  53. I use ING for a couple (what I consider) more liquid or available savings funds.

    Then use SmaryPig for longer term savings (saving for down payment, engagement ring, graduation present). This allows me to have access to funds when I need them, and keep my mits off the long term goal funds.

  54. I know this must have been asked previously, but for the sake of me and any other Brits reading this – is the set up of ING savings the same in the UK as it is on the US site featured here? There is no indication of this on the site and before opening anything I want to be sure I would be able to benefit from this feature.

    Cheers

  55. Ally bank has the same sub-account feature with a consistently higher interest rate. I have both banks and I earn nearly twice the amount I have earned on the ING account in the last 3 years.

  56. [...] Add a “Stupid Mistakes” Sub-Savings Account. This is a great idea, because from time to time, we all make a dumb financial mistake that actually costs us extra money. If you’re prepared for it, it won’t sting quite as much! [I Will Teach You To Be Rich] [...]

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