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

November 06th, 2008 - 121 Comments

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.

* * *

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

* * *

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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121 Comments

 

Comments

  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.

  11. I really love this idea. I kind of do it, in a sense, with my utilities in that I always pay $100 a month towards my electric and gas regardless of the price (it simply carries over as a balance.) However, storing that extra money in an account that earns 2-3.5% will actually earn me money.

    I do not have an ING account yet but will apply for one tonight. This is the best tip yet as it can be applied to so many different facets of life… love it.

  12. The ING tip is real gold… how long have I waited for this!

  13. (I posted this comment on the discussion group on Wesabe (http://www.wesabe.com/groups/4-saving-up/discussions/2703-save-1000-in-30-days-can-you-do-it), but it seemed worth reposting.)

    Okay, I don’t know how I feel about Tip #6. I don’t own a car, so fuel hedging doesn’t apply to me. But hedging as it applies to other stuff, like utility prices? Heat is part of our rent, but we cool with window A/C units in the summer. So for the summer months, our electricity cost goes way up, and in the winter, way down. I suppose I *could* continue “paying” three times as much to Con Edison, and put the overage into a savings account. It seems kind of pointless, though, when the alternative use of that money is paying down debt. Maybe Ramit’s just not thinking in terms of someone with debt?

    I’m not sure I’m getting this one, though. I thought “fuel hedging”, as the airlines did it, meant that they bought a lot of fuel when it was cheap, and that tided them over when it got more expensive. This is different — it’s not like I can buy extra electricity from ConEd at the cheaper rates right now, and use it when the rates go up. I’m stuck paying whatever their monthly rate is, regardless. All this “hedging” is really doing is “saving up money for when things get more expensive”, and I have an emergency fund for that (not to mention that I will just budget for the more expensive months when they get here).

    What am I missing?

  14. I’m with Derek and Trevor. This is just a mind trick that makes you _feel_ like you are saving money. You could “save” the whole $1000 using this tip by merely pretending that gas prices could reach $10/gal or more soon. This concept only really saves you money if you stockpile gas when prices are low. However, if you have some psychic ability that lets you _know_ how future gas prices are going to move compared to today’s, you should be betting futures instead.

    This is not a real money-saving tip, just mental trickery. You could just as easily say “convince yourself that you would have spend $200 on clothes this month, and then put that money in savings instead of buying clothes”. That’s not necessarily a bad thing if it makes you save money, but it’s not actualyl cutting costs or increasing income in any way.

  15. To clarify a bit more, Kat has it right above. When you _pretend_ that your heating costs are $100 all year long, you don’t actually save more money. That would only happen if you somehow entered into a binding contract with your heating company to lock in your heating costs at $50 per month, and then heating costs increased for everyone else except you. This is what real fuel hedging is, and why Southwest has been so successful with it.

  16. I don’t drive. I bus it everywhere. And use commuter checks to by a monthly bus pass this why I get it tax free. I use to allow my self one taxi ride a month but I’ve cut that out of my budget too.

  17. And the UK fuel prices haven’t come down at all, so no use to me, I’m afraid…..

  18. Wow ramit, i did not know you was saving for a wedding Congrats!

  19. At first like the other, I didn’t understand how this is saving you money. But I think people are getting hung up on the word hedging because it’s not hedging at all. If you ignore the word hedging this tip is saying when your gas/utility bill is low instead of spending the “extra” money on frivolous items save the money in a high interest checking account so you have it when the bill goes up.

  20. The strategy is solid. Instances I have used this are car insurance- say you have 10 payments a year. There’s 2 months where you can just “pay” your savings account without feeling a pinch. A tax refund is another great thing to treat this way and why I don’t mind overpaying a bit over the year to get a refund, which I then think of as money I can live without and thus save.

  21. Here’s how to open multiple savings accounts with ING (not sure if it’s still 100% accurate since ING has updated their UI a bit, but still should help a lot).

    http://www.thesimpledollar.com/2007/07/18/how-to-set-up-multiple-savings-account-funds-within-ing/

    ~Laura

  22. I’m with Derek et al.

    What really would be interesting would be if you could recommend an investment linked to gas prices, or some type of gas card where you could pay in advance buy the gallon and lock in today’s prices. Does anyone have any recommendations?

  23. the only thing i like here is the advice on how to sub accounts on ING – thats really cool and I’ll do that soon. But I while i get the idea behind this, some of us are so poor, that we really do need to use the money saved on gas for other things. like, you know, food and rent. also, obviously this is a personal issue, but perhaps instead of saving for a wedding, working to fight bigotry and homophobia with a donate to no on same-sex marriage bans fund would be a better category for me (and others?).

  24. Don’t make me laugh. This is no hedging.

    To hedge, you buy ETFs such as OIL or USO at current price. So, when the oil (gas) price does go up, you will profit from the ETFs.

  25. Sweet tip on the ING sub accounts. I have an ING account, but this never dawned on me. I’ve been using an excel file to track my “sub accounts” manually. This is a feature that I have been longing for in MINT, and now that MINT is tracking all of my ING sub accounts – I have it. Now if MINT , I think I might finally be able to get rid of my manual tracking excel file!

  26. Is there anyway to set up these types of sub-accounts with HSBC accounts?

  27. Wow this is a great tip! I drive to work in the winter (can’t bike, Ontario winters are cold, wet and annoying) so I’ll definitely use this

  28. @Kiran – the only problem about what you said, is overpaying taxes is giving the government an interest free loan. You could have just had the extra money in a savings account. I don’t mind paying more taxes if its necessary though.

    Congrats on the wedding! Just keep it simple don’t overspend or buy a crazy expensive ring (if you haven’t already)

  29. I’m also with Derek et al.

    @Breck: Yes it is possible to hedge your future fuel needs, and companies do it all the time. They call their bank’s dealing room, who buy the needed volumes in the financial markets in the form of standard contracts (‘futures’). However, these volumes are huge (e.g. crude oil: per thousand barrels). The traders at your bank generally won’t bother with smaller volumes (due to the contract size).

  30. With the price of gas about 90cents per liter here in Montreal, I fill up on Wednesdays before the price goes up for the weekend. I also use GasBuddy.com to see if the price is going up or down in my area. I also have 2, 20 liter (5 gal) which I fill when the price is low. Kinda like hedging. Also drive in the slow lane and save.

  31. It’s not really “hedging”… it’s “averaging”.

    You’re dollar-cost averaging the price paid for the fuel over a longer term. The problem here is that you have no idea what the average price of gas should be. Therefore, you’re speculating that you won’t end up paying more overall — you would fail to “hedge” if the price of gas kept going up.

    “Hedging” requires that you lock in a lower price using derivatives. Maybe you should purchase call options for gas at lower prices than today (which is near impossible for the average investor). That would guarantee the price you pay over the course of the year.

  32. @Breck (continued): speaking of an investment, what you can do is buy the ‘future’ and, as times goes by, swap them for a ‘later’ future. See it as a financial speculation/investment rather than actually buying fuel. That way you can buy low and sell high when prices have risen again a few years from now. This is most often done short-term (google for (mini) futures trading) but there is no reason why you couldn’t do it long term.

  33. Allow me to summarize this tip in a single sentence: If something costs you less today than what you are used to paying, set the money aside somewhere instead of blowing it.

  34. The first tip that I’m not already doing or didn’t apply to me. I like this idea, and will set it up forthwith. My gas in St. Louis topped out right around $4/gallon, but is now $2.10/gallon. I’m gonna make it $20/week for me, which is close enough. That will be saving ~$80/month.

    And as some commenters posted, this isn’t a true hedge. It is just saving the difference between maximum and current prices, to help cushion the shock when prices move back towards historic maximums. Still not a bad idea, though. I’m doing a similar tactic with my mortgage. i used to have a line of credit that got me out of PMI on my house. I recently paid that off, but I’m going to take that amount and split it between saving and paying extra principal into my primary mortgage each month.

  35. Sorry, but this tip doesn’t qualify for the challenge, Ramit. The point was to show people how they could create 1000 dollars of new savings in a month. This doesn’t create any savings, unless you assume that the money was going to be spent on something frivolous otherwise. All you are doing is telling people that if the price of something goes down, save the difference. It’s the same basic principle that’s recommended when you pay off a debt: start saving what previously was your debt payment. But this isn’t a way to create new savings. At most, it is a “jedi mind trick” to proving that you had more flex in your budget than you thought. The success of the tip is entirely dependent on a change in gas prices for the better and not on an action the person can actually do. If the tip was, don’t drive your car for a week and save the gas money, it would fit the theme better.

    While not a bad bit advice, it doesn’t fit with the theme.

  36. Awww, this is a good tip, and people are being too hard on you, Ramit! It succeeds in thinking outside the box – everyone has heard “turn your heat down three degrees!” or “bring your lunch!” before, but this gets us to think about saving in a totally different way.

    I’m going to go home and figure out how much I was spending per week on gas at its peak and sock away the difference on a weekly basis.

  37. That is exactly my assumption: that a significant percentage of your money vanishes because it’s not automatically allocated for you into savings.

    Check out the research on automatic 401(k) enrollment for details. When money is automatically saved for you, compliance goes WAY up.

  38. “I promise: No stupid frugality tips” is on the main page.
    I thing all these tips are nothing than stupid frugality tips. I live in Italy and – for now – all these 6 tips are yet implemented by everyone.
    Nothing new from our zone.
    It is all about “buy low – sell high”.

  39. Gosh, useppewind, you must be 100% optimized on your finances then. Maybe you can start a blog and teach us all something! Or, I guess you could complain about free tips and not offer anything of your own.

    Rachel: Glad it worked :)

  40. I actually thought about implementing this tip (before it was mentioned today) in my own personal finances. I do know for a fact that I tend to succumb to the illusion that if I have more in my bank account, I can spend with a little less worries. So this is actually a *good* idea for saving — isn’t that what the challenge is? To save $1000 this month? (surprise, surprise!) And yes, it is somewhat of a Jedi mind trick… but we all know, Jedi mind tricks worked, didn’t they? :)

    Thanks, Ramit.

  41. Excellent tip, Ramit. Too bad you have to take a bunch of arrows from disgruntled readers. I’m with you…if some of these whiners are so insightful, they should post an even better suggestion or start their own blog and show us how it’s done.

  42. A similar tool for those that have a fluctuating income, such as tips, bonuses, commissions or self-employed is to pay yourself a salary. I am a mortgage loan officer and I have done this for years. In the beginning my income fluctuated and therefore I wasn’t able to effectively pay my bills. After a while I figured out my minimum budget and paid myself a salary, Just like you re-evaluate the gas prices every so often, each quarter I would re-evaluate my budget and pay myself a small bonus if I had a lot of extra money in my “hedge” account. Hopefully this helps those with fluctuating income avoid late penalties, overdraft fees, etc.

  43. Guys, I know this has been said but you’re over thinking this. Any time you have to spend money on a necessity (like gas) you just do it regardless of the price. While you are spending the higher amount you still eat and stuff so if you are serious about saving money you can continue to “spend” the higher amount (by saving the difference) when the price comes down.

    This is a good tip, it’s all about getting into a “saving money” mindset which has been the point of every post so far.

    Thanks Ramit.

  44. I’ve thought it would be awesome if someone could figure out a way to really allow the mass public to hedge on gas prices. I envision selling “prepaid gas cards” good for a specified number of gallons (rather than dollar amount). If prices were, say, $2.50/gal, you might stock up if you thought prices were headed higher. Of course, if gas went lower, you would be using more expensive gas (or you could buy gas and save the card. Anyway, this system would allow for true hedging. The seller could easily hedge the risk in the futures market and make great fee income. Is this a viable idea?

  45. Wow, I really enjoyed this tip Ramit! I think it’s a great way to take advantage of this ING feature.

  46. Sorry, Ramit, but I’m gonna have to join Derek, JACK and others on this one: this isn’t really a money-saving tip. While I understand what you mean about cushioning the blow when prices rise, you’re really just redistributing your money from one basket to another. The only money you’ll really make is the measly interest in the savings account…

    You seem to be operating under the assumption that people spend all their extra money on frivolous activities – and yes, while that may be true for a lot of Americans, it’s safe to assume that people who read your blog are more PF-oriented and not as swipe-happy with their cards as, well, everyone else. I know I’m not. :^p

    More to the point, though (at last! haha) – in the spirit of frugality and since I’m a resident of a medium-sized city, I don’t have a car. I usually buy a bus pass or bum rides from my friends when and if I need to go someplace. As others have pointed out, true hedging in your example (gas) would involve purchasing a substantial amount of gas when it gets cheap or making some sort of deal with your local gas station to lock it at current pries (like the SouthWest airlines that you mentioned). As far as I know, you can’t make such a deal with a gas station, at least as an individual customer (a gas hedge co-op, maybe?), and purchasing hundreds or thousands of gallons of gas involves certain logistical difficulties, namely how and where would you store it, and would your insurance company pay you in case there’s a spark in your gas-storing facility. :)) I can already see headlines: “Killed by frugality: blogger’s attempt to hoard gas backfires – literally.”

  47. You may be “hedging” in terms of your budget on paper, but unless you’re actually able to buy the fuel at the lower price, it’s just a mental exercise at best. Diesel stores well, but gasoline doesn’t.

    The ING sub-accounts can be good for budgeting purposes, if you don’t use a chart-of-accounts within your personal budget.

    As for actual ways to save money whilst driving:

    1) Get rid of all the extra crap you keep in the car. Extra weight = extra $ spent to haul it.

    2) Keep the tire pressures up. This alone can save you up to 10% on fuel costs.

    3) Keep your car well-maintained. Dirty oil, clogged air filters, sloppy transmissions, dragging brakes all eat away at your fuel economy.

    4) Don’t drive like an a**hole. Tailgating and weaving in and out of traffic wastes huge amounts of fuel. Every time you have to tap the brakes, you’re effectively throwing out money that you spent to accelerate the car in the first place!

    5) See #4. And admit you do it. We all drive this way at some point.

    6) If you car has an MPG meter, great! Use it when you drive. Turn it into a game and see how high you can get it on your regular route by backing off the gas at various times and taking advantage of your route’s natural hills & dips.

    6a) If you don’t have an MPG meter, at least keep track of how many gallons of gas you’re putting in your car vs. how many miles driven (use the trip odometer that every car comes with) and calculate out MPG.

    7) If you keep good logs of MPG per tank, you’ll be able to spot when something’s wrong with your car long before it becomes a costly problem.

    8) Find a better way to work. Traffic lights are designed to do one thing — stop traffic. The longer the light, the worse your MPG will be. The more lights per route = even bigger hit. So, find a less-congested way to work. Are there any side streets or back roads you can use? You may be able to “only” go 35-45mph on these smaller streets, but that’s actually faster than most main roads over the duration of the trip. Also, can you avoid the traffic crunch? Maybe work earlier/later? Sometimes this just isn’t possible.

    8) Figure out where your car’s MPG sweet spots are. My luxo-barge’s 4.5L V8 guzzles gas at slower speeds and also when starting from a dead stop. At 25mph I get 16mpg. At 35mph I get 22mpg. At 48mph, I can get 40+mpg. At 55mph that drops down to 25mpg. At 75mph that goes up slightly to 28mpg. Each car’s transmission gearing and engine is different, so you’re just going to have to experiment to find out where your car’s sweet spot is. I’m willing to bet money it’s not the magical 55 mph the gov’t's been preaching since the 1970′s (hey Uncle Sam — it’s been 30 years, cars have changed drastically, get with the program!)

    9) Use the ‘net… find websites about “hypermiling” where people try all sorts of crazy things just to get an extra MPG. Let them try all the crazy things for you and see what actually works.

  48. I admire that you use Schwab for your checking account. For anyone who reads this – look into Charles Schwab High Yield Investor Checking. It’s lovely.

  49. This makes perfect sense to me. The challenge is not called how to “earn” $1000 in 30 days, it’s about SAVING. And, correct me if I’m wrong, but putting money that would normally stay in your checking account into a savings account instead counts as saving, right? Beccause if it was in my checking account, it would definitely get spent :-)

    I love this tip! I recently started working on a budget (within the past 3 months) and I think it’s a great idea to save the money that is planned but not required by my budgeted items. Keep it up Ramit! :-)

  50. Well This tip got me to open a higher interest savings account with my existing bank. Their interest rate actually beats ING at the moment.

    I was being stupid with my discretionary savings / emergency fund by keeping it in my bank’s standard offering, but 15 minutes work gave be a net 3.1% APY increase. With my initial deposit I’ll make an extra $52 in interest this month, plus I will use it as a place to drop the savings from this tip and others.

    This Tip: $52
    This Month: $102
    Recurring: $68*

    *I am also tracking “recurring savings”, which will automatically happen in subsequent months (e.g. higher interest rate and lower cell phone bill).

  51. I do this with housing. A typical limit for the maximum you should spend on your monthly rent is 25% of your monthly income. So for a person making $30,000 per year, or $2,500 per month, they can spend $625 on rent. But some people, especially single persons, will spend less than that. Invest the difference in a Roth IRA and use it for a down payment on a house.

  52. I think this is a valid savings tip! It’s a good way to put aside money for the future. Look at Ramit’s sub-accounts. Every one is being saved FOR something in particular – he is planning on spending that money in the future. Those of us with cars know we will have to buy gas for the forseeable future, so why not put some money aside every time you fill up? That way it will be available when gas is back up to $4 a gallon (and it will be sooner or later).

    How many people here would only fill up a half or quarter of a tank because spending $60 to fill up just didn’t fit the budget? With this savings tip, you’ve got a pile of money that you can dip into – guilt-free, that’s what it’s there for!

  53. This makes sense to me. Getting smart about money = saving money, even if it’s not immediately recognizable, like if you were to quit smoking or give up lattes.

  54. Hey Ramit!

    Love the blog but you are misleading people on LUV’s hedging program.

    I work in a fortune 500 Corporate Treasury responsible for hedging numerous exposures (currencies, metals, interest rates, etc…) and we laugh we people say Southwest is a visionary in hedging practices – far from it actually.

    The article you reference from this past summer is quite dated- (from USA today of all places… Who gets Financial news from USA Today? Try Bloomberg or Reuters)

    Did you know that LUV recently took a $247M hit on these hedges? It’s that pesky MTM! (mark-to-market)

    They also have essentially locked in $73 a barrel for 75% of their fuel costs next year!

    That sounds good when crude trades at $147.27 but last time I checked (this morning) it was trading at $61. Using forwards when they should be using options (gives the right, but not the obligation) – would be the right move here

    C’mon Ramit, your a Stanford guy, so let’s do a little more research next time we make claims like that. And sourcing USA Today for financial news is tantamount to citing the National Enquirer for your graduate thesis.

  55. For all of you saying that this is a good tip because it tricks you into saving money, then why don’t we just reduce the entire 30-day challenge into one tip:
    “Go to ING right now and set up an automatic transfer of $33.33 from your checking into your savings account to occur every day.”

    The fact is that we need to *increase* our income and *decrease* our spending in order to actually make more money. If a tip like #6 here or even the above statement to set up and automatic transfer works for you, then that’s great – but the fact is that many people wouldn’t be able to do that because the daily transfer would eventually empty their checking accounts.

  56. Chris – I have to disagree with you. Just a little more than a month ago, we were spending almost twice on our fuel comsumption than we are today. We already know that our checking accounts can survive with that added spending, because we’re forced to budget a little bit smarter. Even though gas is down over 50%, putting money aside as though we were still paying out the rear for gas just forces us to keep that budget that we had already established in place.

    This isn’t about making more money, it’s about being smarter with what you already have.

  57. The concept of saving money that was already allocated in your mind rather than splurging it as free money is important. Thats what I get out of this tip, it requires a subtle shift if you’re already budgeting. If your not that far long yet then your not going to be able to take advantage of it. On a side note I see your planning a trip to china, I’ve been there several times (as an american who speaks no chinese whatsoever) so if your curious about tips feel free to contact me. I’ve been to all the big big cities as well as out in the countryside. I enjoy your blog and would enjoy a chance to reciprocate if possible.

  58. Is it nerdy to say they make playing with money fun!

    I have a bunch of ING sub-cats too. At my credit union I have a separate interest checking account specifically for charity that is connected to a check book. So if I run into someone who is raising money somehow I cut them a check on the spot. Or at the end of the month I send an e-check off to wherever.

    I’m going to try hedging with my fuel and utilities and see how it works. Awesome advice.

  59. Great tip man, I have been doing this last 2 months and its really helpful .
    http://www.bizimunda.net

  60. This seems like a great idea. I know, Derek, where you are coming from. The point is, however, that the $40 a month you are saving in gas or whatever, you will end up spending on eating out, a new shirt, or something you wouldn’t buy if you didn’t have the extra money. Transferring (especially if it is recurring, so you don’t really see the money), keeps you from spending it. You can always use the money for hard times, if you need, or just continue to save.

  61. seconded on the hsbc- is there a way to do sub accounts with hsbc’s online account? currently i have like 3 set up and nicknamed but i’d love to divide them further cause i’m ocd like that…

  62. Hi

    First of all, people have to understand that opinion is like an asshole, everybody has one. Not everybody has to agree with Ramit. Although I am surprised to see people clearly bashing the author who is giving the tips for free.

    Now, I think I agree with you Ramit. I travel 42 miles one way to work everyday, so I feel the pinch when gas prices go higher. Now that we are paying almost half of what we used to pay 4-5 months ago, you are obviously “saving” that money. However, if you don’t “save” that, it’s going to be wasted in day to day purchases. At least this is true for me. But isn’t that the idea of frugal living, being creative, cost cutting etc etc?? Coming up with ideas to save money and preserve it for future? After reading this post, I realized that I can “save” upto $100 per month. I am going to move this money to my emergency fund in ING today !

    Thanks.

  63. Isn’t this more like the hedging previous comments refer to?
    http://mygallons.com/

    They let you pre-purchase gas at somewhat market prices and then fill up by the gallon. I wasn’t convinced that it was worth the $30-40 annual fee, so I never started a card, but it seems more like actual hedging rather than “jedi mind trick” saving. It looks a lot more tempting now that gas is down to under $2/gal

    (although for this month of saving, it would more likely increase spending)

  64. Ramit, your idea inspired me to do a little research. You can make this more of a real hedge than a jedi mind trick (nice trick though it is), and you don’t have to buy a gasoline future (one future is 42,000 gallons). Take your cash difference and rather than put it in a savings account, but shares in an ETF (exchange traded fund) that follows a commodity index. For example the United States Gasoline Fund (symbol UGA). It’s currently at $27.50 per share, close to its 52 week low, and it trades on the American Exchange. You can find a little info here: http://www.unitedstatesgasolinefund.com/

    I have no financial interest in the fund (though I’m considering investing for hedging purposes).

    So, there is a way for us little guys to do what Southwest Airlines does.

  65. Ramit,
    Although I initially didn’t see much value in this ‘mind trick’, I acknowledge now that it makes sense given your assumption that any unbudgeted money tends to ‘vanish’. So if the hint itself was good, was it maybe its presentation that provoked these disappointed reactions? Is this hint really about hedging? Or is it about budgetting expenses with a broad margin and saving rather than spending the leftovers (since ‘fun spending’ already has a budget of its own). I get it now. But it seems like that sexy ‘hedging’ association clouded your message. A lesson for future articles? ;-)

    Merry,
    Excellent suggestion. More convenient than buying futures like I suggested.

  66. This is a great tip and not something I would have thought about on my own! Thanks so much!

  67. We use less than 5 gallons a week, going back and forth to the grocery store. We both work at home right now and don’t really go anywhere. If/when we begin commuting again, this tip might be a consideration, depending on how close the income comes to the budget.

    Oh, my eBay item sold today, so I finally have tip money to include!

    Today’s tip: $0
    Cumulative: $7.75

    Whoohoo! I’m well on my way to $1000!

  68. I would add looking into a gas rebate card (as long as you pay it off completely each month). In some cases, it could net you a few weeks to a month of free gas a year. When I use mine I automatically deduct the amount from my checkbook like I’m using my debit card so when the statement comes there are no surprises and it’s already been accounted for when I pay the statement amount. Some cards will give from 2% – 10% rebates. Our household spends around $300/month on gasoline for two cars so even at 2% the savings add up.

  69. Ramit, Thanks for the tip of the sub-account on ING! I already had an account for the purpose of savings and property tax but had them lumped together. This sub-account is good in that we can set aside the amount for the fixed property tax and make sure not to dip into it.
    Also, thanks for the tip about mint.com. This type of sw seem to work really well if you purchase everything from your debit card so everthing spent could be categorized. The only thing is, I purchase and pay majority of my expenses from a credit card since the credit card offers cash back (yes, CC is always paid in full.) Could you reccomend any tips to better utilize the sw or ie create a budget or dash board on where the money is going if you pay your bills and purchases from a CC? Or a good debit card that provides cash back, would be good too.

    Thanks! Btw, love your sense of humor. Your commentary and expression always crack me up!

  70. It’s a good idea, in that it insulates you (for a time, anyway) against future price hikes. But it doesn’t exactly save money on gas prices, does it? Seems like it just defers payment. It saves for a rainy day but doesn’t cause the rainy day not to happen. That notwithstanding, the value is that when prices do go up, you have some money to pay for gas without having to forego niceties such as…say, food.

    I have a friend who buys gasoline and stores it in five-gallon containers when the price is low.

    When he has to travel to outlying small towns, where prices are always higher than they are in the city, he buys extra gas here and carries it in the back of his tiny pick-up. When he needs to refuel, he uses the city-bought gas, often saving as much as 30 cents a gallon.

  71. @Ramit Sethi and for all: (sorry for my poor english)
    check this tips out, instead:

    -at home, use low consumption bulbs (or high performance)
    -here in italy diesel is about equal to gasoline, but GPL-cars are a lot more cheaper
    -…….

  72. I do a similar thing with my credit card bill. I tracked my monthly balance, since I always pay it off each month. I try to keep the balance low and if i’m lower than my spending limit i put the difference into my ING.

  73. Love the tip about the “sub” accounts. I’ve got ING checking and savings and always wanted a feature like this. As others have done, I used to track savings for large purchases on paper. Now I’ve been able to create smaller sub-accounts for various things I save up for and pay in lump sums. (Auto insurance, gym membership, payoff funds for my 0% apr credit purchases). It’s much easier to have everything in its own account than it is trying to remember how much of that total was for which purchase.

  74. Is it even possible to go to a gas station and fill up containers with gas?
    I agree with the above posts that state this is more of a savings tip – “a jedi mind trick,” as one user put it. If the aforementioned question is possible, then it seems the best option to save on gas would be to buy in bulk when it looks bottomed out. Then once it goes up in price, you could use the gas you saved. If it continues to go down, you could simply keep filling up at your local pump. But, eventually, it would surpass the price you bought the gas at in bulk and you would profit.

  75. Cool idea Ramit. Tricking yourself into saving is a great way to do it, especially if you’re like me. I like your “if money burns a hole in your pocket – stop putting money in your pocket (instead of stop wearing pants with pockets -ideas.” As a combo of the two, I just started commuting to work via train instead of car most days. This saves me not just wear and tear on my vehicle, but gas money most of the time (depending on prices per gallon). Also, I was able to get my insurance way down because I only allow myself to drive once per week max. I think I’ll try our ING trick.

  76. This is kind of an interesting idea. I actually just hedged my gas cost at petrofix.com. I bought a years worth of protection. They pay me when gas goes up and I still save when gas goes down. Considering that gas is pretty low ~$2.15 here, I thought it would be a good idea.

  77. If you’re putting all of your extra $ towards paying down debt, you can’t do this tip.

  78. Opened an ING account today. Saving $20 every week. Not bad…extra $80 per month not spent on impulse purchases, fast food etc.

  79. hmmm… Rather than create a seperate hedge I’ll just funnel whatever I save over $4.19/gal into my savings for the month, since I’m currently building my emergency fund I can then call a portion of soaring gas prices an “emergency” if I wish.

    I generally purchase about 8 gallons a week premium (old car, she needs the good stuff) which on Sunday cost me $20.88 @$2.47/gal (8.45 gal) and would have cost $35.41 for a “savings” of $14.53 which I have transferred to my savings account.

    If I do that all month I would save $58.12 that I otherwise would have spent on random stuff.

  80. While it may look nice to have different tabs, etc., it’s really all just mental. If you already save as much as you can, whenever you can, this ‘fuel hedge’ is already employed.

  81. While this may not be a “saving” tip per se, it is, in fact, a money making tip. Putting “extra” money into an interest-bearing savings account is better than lett ing it sit in your checking account where it can be easily pissed away on something stupid – like my inevitable “I don’t want to eat the sandwich I brought today” lunch.

  82. @alexinmadison, I think it is a good tip for some. Your “I don’t want to eat the sandwich I brought today” example is exactly what gets me tapping into savings. So, if I trick myself by not having immediate access to it, I’ve saved a little, plus some interest.

  83. I think what this tip reinforces for me is to put what I’m managing to save into some kind of interest-bearing account or to use it to pay down debt in order to decrease debt-related expenses even more. Those things sound pretty basic but sometimes I just need a little push to actually DO it. Between full-time work, family, housework, community involvement, car maintenance, and all the million other things we have to do with our time, a little help to make these financial tasks a priority is appreciated.

  84. I’m with Derek et al.
    This is just a *reason* to put some money in a savings account. It does not actually reduces my spending.

  85. People that are with Derek. If you are not part of the solution, you are part of the problem. Now I understand why our country is in such a state. Too many people trying to find fault in solution. I love this idea and alot of the ideas given. Stop overthinking things and finding the glitch in everything. If you don’t do it, how much money would you have saved. NOTHING. So if you don’t have something positive to say to our host, go someplace else.

  86. I agree with Kenny about people getting hung up on the wording. I did this for years with our utilities until they started offering the average monthly payment plans, which was what I had been doing on my own. Water was higher in summer because I was watering my lawn so much to keep it alive and low other times — I sent the same payment in all year and it just carried over as a credit for those high months. As for the sub-accounts on ING that Dc asked about — you do have to set up another account (i.e. each has a different account number) but what Ramit is referring to is that they are all under your account as in customer number. Of course this “hedging for fuel costs” won’t work for me either as I am still paying $4.06/gal here on base in Japan, though I have heard of the lower prices stateside.

  87. I guess you didn’t read about the $250 million charge Southwest took last quarter because of bad fuel hedges.

    http://www.businessweek.com/lifestyle/travelers_check/archives/2008/10/southwest_sees.html?campaign_id=rss_daily

  88. Ramit, I’ve been using the ING Direct “sub-account” strategy for many years and credit it for much of my financial success. I’ve never known anyone else who does this. I typically have 8-12 accounts at any given time….emergency, auto/home insurance, property tax, car fund, vacation fund, ring/wedding fund, etc. A pre-determined amount of money is automatically transfered into each of these accounts each time a paycheck is received. I find it a great way to smooth my monthly expenses and allow myself to be prepared for any “surprises”.

  89. I use this strategy for quarterly and annual expenditures. I sat down and added up all the bills and misc expenses which come up during the year. Annual bills include Insurance, license fees, trash and water bill. The misc expenses mostly include groceries which are bought quarterly; TP, Paper Towels, Razor Blades etc. This is one of the best things I have ever done. in the past, It never failed that I would run out of everything in a single month. I would take a large hit and be behind in something else. Now, I know longer have to worry about it. When ever these expenses come up I simply transfer the money over to my checking account.

  90. Anyone out there a former smoker? Ever thought about how much money you saved by quitting smoking? I added it up one year and realized I could have paid for a round=trip ticket to Fiji. Except… I never took that money and set it aside each day. So I have yet to get to Fiji. Applies to any vice.

  91. [...] challenge and am following along avidly. So far my favorite tip from the challenge has been Use Gas Prices to Become Your Own Hedge Fund. I calculated how much I had spent per week on gas while prices were high vs. after prices dropped, [...]

  92. The Combination of falling gas prices and my wife working from home 2 days a week has resulted in our gasoline expenses to $153 in this month. The most we spent on gas was in June ($370).

  93. I think the negativity on these boards from people who compalin that they already know this stuff, this stuff doesn’t apply to them and these are stupid frugality tips are just angry people looking to blame others for whatever tough circumstances they find themselves in. Understandable, but lame. There is no magic way to be rich and times are tough for everyone. We’re all just doing the best we can.

    I think this was a great tip – and got me motivated to look into ING and Mint. I think Ramit is great and I’m thankful I found this information.. it’s put me in a mindset to be proactive about my savings as well and my overall finance situation. It costs me nothing to benefit from what others have found useful. The negativity is, however, a complete waste of everyone’s time – no one’s more than the people generating it…

  94. I haven’t looked into the sub-accounts feature in ING yet, but we have been transferring the difference nonetheless. Our fuel use is up this month thanks to some unavoidable appointments, but because of the drop in gas prices, the remaining amount in our budget was put in savings.

    This tip: $50
    Current total: $220

  95. [...] Ramit Sethi is running a Save $1000 in 30 days Challenge over at I Will Teach You To Be Rich.  Some of the options are no brainers (Pack lunches for the rest of the week), while some are pretty innovative (Use gas prices to become your own hedge fund). [...]

  96. I love the detailed information you give. Here in Virginia gas is in the $1.50 range and it would be tempting to blow the difference. Thanks for the great tip. -Clara

  97. [...] on to this little nugget of monetary sanity by an article posted on Ramit Sethi’s Blog, I Will Teach You To Be Rich. When I looked further into the ING Orange savings program I truly found no down side–and [...]

  98. This blog post doesn’t show a new thing “to save on”, it shows a new “purpose to give to” the money that is being saved.

    Putting away money is saving. But giving that set-aside money purpose is JUST a financial strategy. It’s like saying “Squeeze more money out of your pay check this month into your kid’s college fund”.

    For this reason I think this tip should not be part of the “Save $1,000 in 30 Days” Challenge.

  99. This is missing the whole point of hedging as you’re simply saving the cash to pay for future increases in fuel prices – the only benefit you’re getting is a small interest rate on your money. If you were to use your saved cash to buy a fund (ETF or ETN) that tracks oil, gasoline, or natural gas prices (by investing in an array of futures contracts), then you would truly be hedged against rising prices. As prices rise, so does the value of your investment; you’ll pay higher prices at the pump, but get nice returns from the fund that you invested in, thereby hedging your fuel costs. Sadatay.

  100. Ramit, what you are proposing is not “hedging”. Hedging would be buying oil futures when the prices are low so that even if prices rise you are protected from that volatility.

    While what you suggest is good because it promotes saving, you may want to correct your choice of words.

  101. I’ve done this with my heating and cooling bills in a sense. We have cold winters and hot summers so between the gas and electric bill it’s usually comes up to about the same every month total except for a couple of months in the spring and a couple in the fall when the weather is perfect. So I save the cash that would go to the gas or electric company and move it to my emergency fund savings account.

    Now when there is a car or home repair I have the cash on hand.

  102. [...] of polluting fuels. And by big, we’re talking upwards of a $1.00/gallon tax on gas. Ramit at IWillTeachYouToBeRich.com has an excellent article of using gas prices as a hedge fund against the fluctuating prices of gas [...]

  103. How about stopping buying ‘useless’ stuff.

  104. Im not sure if anyone else mentioned this as I didnt read all the comments:

    I take that extra gas savings and invest it in an ETF designed to track the price of crude oil. In this way the whole operation becomes much more like a hedge because you are essentially locking in the cheap gas prices since generally when gas prices are up so are crude prices. Of course this isnt on a one to one ratio but you can see how this method garners even more savings as you can sell shares at a higher price to get cash to pay when gas (and crude) is expensive, then buy shares them at lower prices with your gas surplus when gas(crude) is not so expensive.

    As I said crude and gas prices are not one to one ratio but they move in relatively the same direction so this could potentailly work even better that putting the money in savings assuming you are up for the risk…

  105. Ramit,

    I am a long-time lurker of your site, but this is my first time commenting (sorry, I know you hate that).

    I just wanted to tell you that a couple months ago I finally took your advice and transferred my savings into an ING direct account. At the risk of sounding like a commercial, I have to say that it was really easy and I like how I am able to separate my money into different “buckets.” Furthermore, I have earned a LOT more interest with ING than I was earning with my normal bank.

    Thanks so much for this great tip, I will continue to apply your tips to my life and hopefully it will continue to “pay” off. (har har)

  106. This tip is similar to the old idea of budgeting with “envelopes”: set up a budget in which periodic expenditures are pro-rated per month and flexible or variable expenses (food, fuel, etc.) are given a somewhat padded average value per month; then, put the amount budgeted for each line item in an envelope (or sub-account) when you are paid. Spend the money in each envelope when a bill is due or a purchase is required, and bring forward the amount left over (if any) from each envelope at the end of the month, to apply to that budget item in the future. Make up for shortfalls by extra economizing the following month, or by redistributing overages from other “envelopes”. In addition to earning interest income if you use a savings account to hold money in your “envelopes”, you can SAVE money by having the cash you need when there’s a spike in the price of a necessity like fuel, or when a bigger bill comes due — like an annual insurance premium, for example — rather than having to pay these expenses with a credit card or loan on which you will pay interest. That’s how hedging against future expenses saves money even though you can’t stockpile the commodity when it’s at the lowest price.

  107. [...] rich? 5. What does rich mean to you? 6. Hey, how’d you pay for that iPhone? 7. How much do you automatically save each month? 8. Why’d you pull your money out of the stock market? 9. You’re always thinking about [...]

  108. I understand taking the money from a checking account and putting it in an ING savings account, but I don’t understand the reason for creating a number of ING savings accounts, rather than just one. Is it simply for accounting purposes??

  109. I’m lucky I’m Chinese. We don’t have to worry about this, since we earn money during weddings xD

    It’s tradition for guests to give money, instead of gifts.

  110. I know you love to push the ING Direct accounts, and they really do sound like a good idea. However for those of us offshore, like me in New Zealand, is there a comparative option? ING does have a branch in Australia, but that still does us ‘across the ditch’ no good! Any feedback would be appreciated! Cheers!

  111. New reader here. It appears the 3% interest on the ING account is down, especially for the lowest tier, or else I am missing something. The best I have been able to find is FNBO Direct–1.9% on savings, non-tiered.

  112. Lori,

    All savings account interest rates are down right now due to the historic lows in interest rates generally (mortgages, fed prime rate, etc). What ING gives you is the easily created multiple/sub accounts with pretty easy access (transfers in and out of “linked” accounts like checking) and a very competitive interest rate for an FDIC insured liquid/cash savings account. ING Direct Orange Savings has been as high as 4 or 5% since I’ve had my account, but is currently about 1.5%, which is a bit lower than FNBO Direct’s 1.9%. I would need to do more due diligence to comment on any other pros and cons between the two accounts/banks.

  113. Lord, you don’t need any of this complicated (I.E. time-consuming setup and management) budgeting junk.

    Just withdraw a fixed cash amount each month for your discretionary spending (whatever you define that to be) and when it’s gone, it’s gone, you don’t get to spend anything more – period. Keep that cash amount small, like $50 if you’re young or a couple hundred if you’re older. The rest goes to bills, and set up a regular diversion for longer term investments like IRAs and HSAs,etc.

    There is absolutely no need for complexity whatsoever.

  114. Howdy!
    Here’s how you can do real “hedging” on a scale accessible not only to the big companies: when there is a sale on non-perishables which you consume a lot of anyway (which includes long shelf-life products such as UHT milk, cereals and canned goods), go to the shop, and buy up a several-month supply. Don’t buy anything else though – (other than perhaps the usual shopping) these sales are generally a trick to lure you into the shop and buy a whole bunch of other useless things which are more expensive than usual… It’s like going to Las Vegas, and enjoying the cheap accommodation, great buffet breakfasts, but STAYING AWAY FROM THE GAMBLING… ;) This technique is only for those who are strong enough to resist the many temptations…

  115. I am basically doing the same thing with an excel spreadsheet. I make regular deposits in a high interest savings account at my bank and track the deposit amount and my different “subaccounts” on my spreadsheet. Works for me.

    Years ago we lived in Europe but were paid in US $ and had to exchange our salary into local currency. Over the years we experienced pretty wild fluctuations in exchange rates. We based our budget in local currency. If the $ was strong, the “extra” went into a savings account, accumulating and ready for the next market dip.

  116. wouldn’t it make more sense to buy oil stocks or a manage future ETF this is not real hedging because your not capturing higher prices

  117. should be called – a qaurterly equal payment plan for continual purchases.

  118. [...] financed for it. Personal finance gurus like Ramit Sethi advocate conscious spending plans via automated savings accounts divided into purchase goals, and I think that type of personal finance is not only more responsible but more rewarding. I think [...]

  119. [...] If you’ve done all that and are looking for the next step, implement the 10-Year Savings Strategy using sub-accounts. [...]

  120. [...] tips and silver bullets, custom-written for their situation. That’s ridiculous. If the tip on hedging your fuel costs doesn’t apply to your situation because you don’t have a car, a smart person would say, [...]