Saving Tip: Using sub-savings accounts for unexpected expenses

44 Comments

5 6 1

“The real troubles in your life are apt to be things that never crossed your worried mind, the kind that blindside you at 4 pm on some idle Tuesday.”
– Kurt Vonnegut

I wish we were always smart enough to prepare for flat tires, traffic tickets, coffee spills on our laptops, emergency flights for someone sick in our family, and other unexpected expenses. But we’re not — even though they consistently happen, month after month. Ironically, the expenses themselves may be unexpected, but the occurrence of them is very predictable.

Here’s an example late fee that I just got:

late-fee
I wish I hadn’t gotten this, but things fell through the cracks with the book launch. After learning this the hard way a few times, I decided to get proactive about unexpected expenses.

I’ve set up a sub-savings account and now save about $150/month for unexpected expenses. At the end of the year, I sweep the account, taking any extra that’s still in it, and move it over to my “general” savings account.

In your savings account
In my ING savings account (now called Capital One 360), I create sub-accounts by logging into my account, clicking “New account,” and following the instructions. It will seem like you’re creating an entirely new savings account, but you’re not — after creating it, it will be a sub-account within your main account. ING Direct works best for me. I haven’t found another savings account that lets you create sub-accounts, but you can always use Excel.

These sub-savings accounts are incredibly useful for focusing your savings. I’ve previously written about using them to hedge fuel costs, but in general, it’s easier to save for specific goals rather than a guilty, “I should save” account.

Sub-accounts in your email
I also have a sub-label set up in Gmail using Folders4Gmail:

gmail-labels-stupid-mistakes
I like to add all important emails to various sub-accounts so I can eyeball them and get a sense for how often something is coming in — especially when I can’t easily track something (e.g., how many speaking engagements I’m getting).

Book excerpt: Unexpected income & expenses
From Chapter 4 (“Conscious Spending”) of my new book (#1 Amazon bestseller), where I describe how to handle unexpected income and expenses:

unexpected-expenses
amazon-book-small-image
amazon-logo-smallbarnes-noble-small-logo
Read the reviews and forward your receipt to iboughtthebook@iwillteachyoutoberich.com to get spreadsheets, a signed nameplate, and bonus content.

5 6 1

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44 Comments

5 6 1
 
  1. Hey Ramit, new reader, but I really like this tip. Especially the stupid mistakes category!

  2. Nassim Taleb, author of the Black Swan, has a similar tactic. Granted, he’s certifiably rich: He puts aside $2000 at the beginning of each year to cover Black Swans (unexpected events and stupid mistakes). At the end of the year, if there is any money left, he donates it. The end result is that he doesn’t really stress out when something bad happens, because that money is gone anyway.

    I do a similar thing for my dog. I know that hideously expensive vet bill is coming down the pike. Maybe not today, maybe not this month, but it’s coming. So I have a sub-account with ING Direct that I funnel $25 to every paycheck.

    My philosophy is this: You either save beforehand and put money aside for these kinds of events. Or you save after the fact as you put money aside to pay off the charge you made to your credit card.

    Another suggestions I have, is to start a sub-account for a new laptop or computer. It’s only a matter of time before your computer dies. Rather than have to unexpectedly plop down another $1000 when that happens (or put it on my credit card and pay it off—as it accrues interest) over the next year. I prefer to pay in advance and let it accrue interest on my behalf, instead.

    The one psychological barrier I’ve found, is that it’s a lot easier to raid your laptop savings than it is your pet’s emergency fund.

  3. kevin from minneapolis Link to this comment

    Does creating all those accounts affect the amount of interest you earn?

  4. You can create sub accounts using SmartyPig (www.smartypig.com). I signed up several months ago before opening up an Orange Savings account with ING. The benefit of SmartyPig is that other SmartyPig members (preferably your friends and family) can share their savings goals which helps people to stay motivated. When you are being watched, you are more likely to do the right thing…in this case, save your money. The sub accounts you create are towards financial goals. Money can be transfered between your main account and your SP account. Once a goal is reached, you can also elect for a gift card (extra 5% back too! :) ). I think I will stick with just transferring my balance back into my savings/checking account when my goal is reached.

  5. Ramit,

    In my humble opinion, you are confusing people by insisting to call the “New Account” a “sub-account”. Let me explain why I think so, by asking a few questions.

    1. In what sense is the new account subordinate to the original account? Do they share the same account number? NO.

    2. Will closing the original account automatically close the “sub-account”? NO.

    3. If you add money to the “sub-account”, does the balance in the original account increase? NO.

    I think you can get away with calling them sub-accounts, because the interest rate you earn is the same in the “sub-account” as in the original account. Since that is the case, it makes sense to have multiple accounts to help organize your finances…

    BUT, I do wish it was possible to have TRUE “sub-accounts” with ING. I wrote about it at another blog earlier, here is my explanation of why true “sub-accounts” would be great:

    ================================================================
    Now that ING is offering Tax Free Savings Account, it would REALLY be great if we could truly have “sub-accounts”.

    Think about it. The way things are today, you can have only one (1) TFSA account. But, we all realize the benefit of having more than 1 savings account; it makes it easer of us to ‘categorize’ our savings. So, if you are like me, you have one TFSA account, and multiple other “non-tax-free” savings accounts. BUT, this way I”m only earning tax free interest on the money in TFSA, not my other savings. This is not what I want!

    It would be GREAT, if all my savings could be in TFSA, just in different “sub-accounts” of my main TFSA account. This way, ALL of my savings would be earning tax free interest.
    ================================================================

    just my 2 cents,

    Uncas

  6. EmigrantDirect also allows subaccounts.

  7. HSBC online savings allows you to quickly create new online savings accounts. You aren’t restricted to just one account. Then you can manage all your accounts online and give them nicknames. Not quite as convenient as ING, but HSBC has higher rates of return and this small inconvenience is well worth that IMO. Nevertheless, it is possible to do sub accounts with HSBC like ING.

  8. As one who doesn’t always do really well with staying on top of all of my financial plates that are spinning, I find this a really good idea to avoid those depressing days when the giant bills come crashing down.

    I don’t have an ING account but am pretty sure I can implement the same sort of thing with my current online banking system.

    Thanks for a solid tip…and I don’t think many of us are too confused.

  9. Hey Ramit
    Read the first chapter to the book online and ordered it on amazon. Great stuff. Looking for the spreadsheets to get my credit in order. Anyone know where these are for download? Cannot find on the site.

  10. Oh, it’s not Vonnegut, it’s Mary Schmich, Chicago newspaper columnist.

    That said, I have HSBC, but am too lazy to do new/sub accounts…

  11. LOL@ stupid mistakes account.

    As hectic as life is, we would probably all have several account, especially for people with kids

    Vacation and emergencies are the main accounts we have, so I guess my sub-accts all fall under one big umbrella.

    I’m not as meticulous. However, everyone is different when it comes to saving. The main thing…. we are saving!

  12. So….this is an emergency fund that you clean out every year?

  13. Last week, my iPhone got stolen and since my AT&T upgrade is not coming up anytime soon, I would need to pay $500 to get a new one. I was really pissed for a couple of days…especially since this would definitely set me back on my saving.

    And then a friend suggested creating a “Bad Stuff Happens” budget annually and setting aside a sum of money for that. Then I won’t feel so pissed off and powerless about this.

    I like that your post iterated that.

  14. ING Direct is down to 1.5 percent on the Orange Savings accounts. Is it time to pull our money out?

    Is it a good trade off to have your money in a Dutch bank for a 1.5% gain?
    http://en.wikipedia.org/wiki/ING_Direct

    additionally, sure they’ve already been bailed out, but isn’t a credit union (in the united states) safer?

    ING Gets a $13.4 Billion Bailout from the Dutch Government
    http://kevincolby.com/2008/10/22/ing-gets-a-134-billion-bailout-from-the-dutch-government/

  15. Pishabh Badmaash Link to this comment

    If you were a real Indian only then you would be driving maroon colour Toyota Camry only

  16. Hey — Just found this site (thanks to Tim Ferriss) and here’s the question: as someone who is 44 — and soon to be 45 — do your ideas still work for me, or do I need to develop a more aggressive strategy given that I have fewer earning years left?

  17. @MDAccount
    I don’t want to speak for Ramit but the basis of most of what Ramit says is based on intelligent and conscious spending and taking control of your finances.
    That means optimizing your spending (like re-negociating your car insurance premium that you will pay anyway so why not try to get a few hundred dollars off), automating your finances (putting money aside before you can actually spend it) and more generally take a few steps to really know what’s going on rather than not doing anything because you think it’s complicated and boring.

    So, yes his ideas will still work if you’re 45 or any age. Since you’re asking, it probably means that you realize that your financial situation could be better, so you will probably have to be more aggressive by putting more aside maybe?
    But, in any case, my take on Ramit’s blog and ideas is that he wants to push people to take control. Once you’re conscious about where your money goes, the rest should fall in place: “I spend too much on restaurants”, “I don’t really need these subscriptions”, “I need to prepare for that coming big expense”…

    As a lot of good advice, it’s common sense and common sense doesn’t stop at 40.

  18. HSBC has an Online Payment Account which is a better alternative to a standard checking account because your money earns more interest. Ramit, I really like this sub-account concept but it seems easier and more flexible to manage in Excel. This way you can plan your expenditures by category and sub-category (eg: Clothing -> Shoes) and then compare that with your actual burn rate on Mint.

    • Nick, my guess is you are probably pretty technical. If you ask the average person whether they’d use Excel to manage their sub-accounts on an online high-interest savings accounts, they’ll look at you, blink with confusion, and suddenly vomit. This is part of the 85% Solution I talk about in the book: If it gets you 85% of the way there, great — move on w/your life to more important things.

  19. Lol! I hear you man. I just read your tip on the web site. I’m on way way to Borders right now to buy your book. I’m a Gujarati male – always looking for ways to save. =) There is definitely something to be said about simplicity. Keep up the great work Ramit!

  20. Not everyone wants to track every little eventual expense.

    I would think the “Doe” fund, the laptop fund, the pet bill fund, the car maintenence… could all be bundled into one big account. At least this is how I execute it. In fact I have that bundled with my vacation and gift fund also.

    I am glad to see you are still a big supporter of ING, even though there are better interest rates to be had elsewhere.

    I can’t explain it either, but for some reason I’m willing to accept their slightly lower interest rate (HSBC is advertising 1.85, ING 1.5).

    I DO believe that each of these sub accounts are separate, they show a different account number in my ING Direct page.

  21. Nicholas MacDonald Link to this comment

    @anon:

    ING Direct is fully FDIC insured, so, regardless of nationality of the owners, there’s no risk if your savings are lower than $100,000.

    That, and it’s not really an offshore bank; ING Direct USA is a subsidiary incorporated in the US, meaning it’s functionally an American financial institution.

  22. I love the idea of a slush fund, rainy day account for the stupid things in life that just happen. Call it the “Murphy’s Law” account. It is inevitable that you will need it. How about this – what if you just set aside 5% of the price of every major purchase that you make into this fund? It would be far better than buying warranties and such.

  23. I’ve stuck with ING despite the 1.5% interest rate mainly because they don’t charge ridiculous fees. Ramit talks about this at the beginning of chapter 2 of his book.

  24. Michael Kogelman Link to this comment

    Financial planning aside — what state are you in that charges $165 to register a freakin’ car! — I’m in NJ, supposedly one of the highest taxed states in the country and I pay $43/year to register each vehicle. That’s just absurd, and a late fee that rivals doubling the initial cost? W.T.F.?

  25. @Michael Kogelman

    Welcome to California :)

  26. Good Tips Ramit, I am a big sub-account supporter.

    I would caution users of Money Market accounts in general (including ING Direct), that out-going money transfers are typically limited to 6 per month (and if you go over this for 3 months out of a given 12 month period, ING Direct reserves the right to close your account).

    This includes transfers between sub-accounts (say, ‘General Savings’ to ‘House Down Payment’) and all out-going transfers (any sub account to a brick-and-mortar checking account).

    Happy Saving!

  27. [...] amount accordingly. This prepares us for price increases at the pump. I borrowed that idea from Ramit Sethi.) Powered by Stumble! for [...]

  28. Ramit,

    This is a very interesting way of doing finances. I could see where someone like myself could take advantage of this as I am very much of the compartmental brain type.

    However, I know at one time they had competitive interest rates but now they are very low. Much like those you would get at a local bank. Is the ability to have “sub-accounts” enough to override the fact that they pay 50-75% less than other online institions. An example would be Flagstar Bank.

  29. Hi Ramit! I’m a new follower of your blog and I just ordered the book. I just had a quick question for you; I already had a mint.com account but I’m having trouble adding my ING information. Has anyone else experinced a problem adding them to their mint account? I’ve tried several times, but it looks like I’ll have seek further help from either mint or ING to get the problem solved.

    Thanks for all of your great advice Ramit!

  30. I called ING and they said that they do not support Mint, so you have to add your ING accounts to Mint as an “asset”, which does not automatically update. If anyone has ways around this problem, I would be eager to hear.

  31. [...] a hassle than it is worthwhile.  (For a good example of mini – savings funds gone wild, check out iwillteachyoutoberich.com. While I normally love Ravit’s blog, he’s gotten carried away here.) My advice: Open a savings [...]

  32. While I like the idea of sub accounts, I worry sometimes finance gurus spend their spare time brainstorming outrageous new “must have” savings funds the average American (having a vacation fund is one thing but having a separate savings account for unexpected pet exepenses? For each pet? Come on.)

    For me, it all just seems more of a hassle than it is worthwhile.

    While I normally love your blog, Ramit, I’d offer simpler advice.

    My advice: Open a savings account and write a list of clear definitions about what it can be used for (Unexpected car maintenance? Yes. Unexpected bar tab? No.).

  33. I just opened five sub-savings accounts and set up automatic deposits for all of them and it took seven minutes, so I don’t see it as any particular hassle.

  34. [...] One thing I’ve read about and actually done is making saving automatic.  Once I get paid it goes into my ING Direct account and then I split that off into sub accounts like my travel fund and house down payment fund.  I read about this little tactic on I Will Teach You To Be Reach. [...]

  35. Have you guys been clicking the ING savings account link he posted up there? It’s an affiliate link.. The guy’s making money everytime you use his link to sign up at ING.

    So much for credibility…

    • T, I’ve always been open about that. Btw, note that that ING link doesn’t generate any revenue for me, any more — ING has removed its affiliate program for savings accounts.

  36. T,

    while some part of me doesn’t like affiliate links (not sure why, probably because it’s not always clear it’s one), I don’t see why this would be a problem: Ramit is not taking money from you if you sign up with the link, instead ING Direct pays him what is basically a commission.
    If he recommends a book and links to Amazon (which he does now and then) with an affiliate link, I think it’s perfectly normal for him to get a cut: he brings in customers from his review. Yes, Ramit is probably making a nice sum from these affiliate links (though probably not to live on, but at least enough to pay for lattes :) ), but it’s from his readers that he got from a lot of work on his blog.
    If one end up opening an account with ING after reading this, why not?

    Tim

  37. Yeah, I noticed the affiliate link as well. Have to admit I was a little disappointed by it.

    Tim,

    I think you’re missing T’s point. Yes, the money doesn’t get taken from those who click on the affiliate link, but given that there’s an added motive (or at least there WAS one when Ramit was earning commission) for promoting ING Savings Accounts, don’t you find it a bit hard to trust him 100% on this particular topic?

    Ramit, no hard feelings here. I still love your book, but I hope you understand why the affiliate link makes some of us think twice about your advice on opening an ING Direct account.

    Melo

  38. As always, lovin’ the site, lovin’ the advice.

    Just a kind FYI…the quote at the top regarding being blindsided on at Tuesday isn’t actually Kurt Vonnegut. Its Mary Schmich…later made popular by Baz Luhrmann.

    http://en.wikipedia.org/wiki/Wear_Sunscreen

  39. how to invest gold/silver?

  40. how to invest gold/silver?

  41. [...] From reading all this you might think I have 20+ savings accounts with various banks. In fact I have two. One is my primary account from which I pay myself a monthly salary. The other is with an online bank that allows me to create as many “sub-accounts” as I want. A good, and deeply sarcastic, explanation of this sub-account system can be found here. [...]