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Tip #6: Use gas prices to become your own hedge fund

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This is Tip #6 of the Save $1,000 in 30 Days Challenge

Today is one of my favorite tips: To take the money you’re saving on gas and automatically hedge against any future increase in fuel prices.

gas-prices.jpg

The term “fuel hedging” refers to airline companies’ tendency to try to protect themselves by estimating the price of jet fuel and locking in prices to protect themselves if prices go way up. The world’s best airline in fuel hedging is Southwest Airlines:

“Using some simple and some complex investment strategies, Southwest has for a decade locked in the prices it pays for large amounts of jet fuel months and even years ahead of time. Its success at that has protected it from run-ups in crude oil prices and dramatically cut its fuel expenses. Since 1998, it has saved $3.5 billion over what it would have spent if it had paid the industry’s average price for jet fuel. That’s equal to about 83% of the company’s profits over the last 9½ years.”

We can use a similar technique for our own personal finances — and my favorite part is, you can apply this to anything where the prices is variable. Here’s how to do it.

How to use hedging for your personal finances
When gas prices were at their highest in San Francisco, I was paying about $4.60/gallon, which was costing me about $60/week. But now, with a combination of lower gas prices and working at home once a week, I’m saving about $15/week off the peak.

It’s really easy to ignore that and let the money stay in your checking account, where it will be inevitably spent on something useless. Instead, because gas prices have dropped, all of us are saving money compared to a few months ago. Now, you can create an automatic transfer of the money you’re saving and put it in a “fuel hedge” account to protect you when prices go higher.

Here’s how I do it.

1. I set up a high-interest ING savings account (now called Capital One 360), which lets me set up automatic transfers and create sub-accounts within my savings account. I use these sub-accounts for anything major I’m saving for (including a wedding, even though I’m not engaged — see why).

ing-sub-accounts.jpg

To set up a sub-account, log into your account >> Open an account >> Orange Savings Account >> Orange Savings Account (from the drop-down). Create the nickname, etc, and you’re done.

2. I know I’m saving about $15/week, so I transfer that amount to my fuel hedge account.

ing-auto-transfer.jpg

3. If gas prices go up, you’ll have this money saved to use to hedge against the new higher gas prices. It will also give you time to either cut your costs or earn more to account for the higher gas prices.

4. I set a calendar reminder every 3 months to re-evaluate the price of gas and adjust my weekly savings amount.

The reason I love this is you can apply it to anything you buy that gets more or less expensive. If you pay $100/month for heat in the winter and $20/month in the summer, can you pretend that you’re still paying $100/month in every month of the year and save $80/month during the summer months? Give it a shot — there’s a lot to be done with this tip.

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Tools I use
I use a high-interest ING savings account to manage my savings and sub-savings accounts. It’s free to open, high-interest, and they don’t send me a bunch of crappy junk mail. It just works.

I also use Mint to track my spending and get averages for my spending.

I use Google Calendar to set reminders for myself in the future.

Total savings: $20 to $120 per month

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Last thing to do
1. Leave a comment on this post describing how much you’re saving with this tip. Each day, I’ll ask you to post how much you’ve saved cumulatively. Use this as a way to track your own progress (it will also encourage others to join)
2. Want to submit your own savings tip? Submit a money tip here.

If you liked this tip, check out my Premium tips — one long, tactical tip per week. Save money or get a 100% refund.

scrooge

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123 Comments

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  1. Interesting. I’m saving ~$10 per week right now in my diesel Jetta, so that’s $40 per month.

    Our natural gas bill fluctuates from $25 in the summer to as high as $130 in the winter, but this is offset a bit by electric bill increases when the air is on. However, we have the golden months of April, May & September when we usually have neither heat nor air on, so that would equal about $50 in utilities instead of $150 or more. Let’s call this $300 annually for the “hedge fund.”

  2. Does this theory *really* cut your expenses or save money? My understanding is that hedging works by purchasing, for instance, a years worth of jet fuel at price Y. Thus, when the actual price rises, it does not matter–you’ve already paid for your fuel at the lower cost.

    It seems to me that you are merely prescribing a “jedi mind trick” to get you to save extra money/rearrange future expenses. Not that this is a bad thing; people should save more. It just does not seem to me that there are any *real* earnings here (besides the marginal interest, that is).

  3. […] Tip #4: Involve your friends in your savings challenge Tip #5: Optimize your cellphone bill Tip #6: Use gas prices to become your own hedge fund (36 votes, average: 3.25 out of 5)  Loading […]

  4. How do you get sub-accounts in ING Orange Savings? I called them and they said I had to open additional savings accounts – that there was no concept of a “sub account”… I’d love to try that part of this trick especially!

  5. I am setting up the transfer now. :)

  6. I’m with Derek. Could you please address?

  7. Added the tip for opening a sub-account above in the original post. Make sure you log in before you try opening a sub-account.

  8. When you talked about hedging against higher fuel costs, I thought you meant filling up when the price is low so that your tank is already full with low-priced gas when the price is high.

    Of course, that’s kind of a “duh – buy low sell high” thing, but I’ve been caught a couple of times with a nearly-empty tank when the prices are peaking.

    You can hedge in the traditional sense by filling up on late Tuesdays and early Wednesdays, when the price is most likely to be lower than on the weekend.

  9. Ramit – Great Tip
    I have a Diesel Golf that I run on Biodiesel. The funny this is… I get a shipment of 50 gallons of Bio to my house when the price is low and use that when prices are high. A bit nerdy and more complicated then your easy to do post.

    I also try to work from home at least one week out of the month.

    Savings from hedging fuel: $20 to $40 per month
    Saving from working from home: $40 to $80 per month
    Total saving: $60 to $120 per month

  10. I am also unclear on how this actually saves you money vs. just being budgeting tool.

    Incidentally, I use this sub-account strategy for a “fun stuff” account where I put money I get as gifts or a percentage of unexpected or extra income. Then I use that money for things I want, but wouldn’t ordinarily buy, special dinners, etc. I’m usually pretty reluctant to spend money on things that aren’t strictly necessary so this makes it a lot easier.

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