Wednesday, January 11, 2017

My Saving System

Over the past year, in the organization of my finances, I was able to get a better handle on things, and come up with my own system for saving and allocating money for investing. Of course I don't profess it to be a perfect system, but it works currently (and I reserve the right to change it as conditions change!). I also don't expect it to be the 100% best system for those reading this, but hopefully one can find something useful in here that may help them with their saving process. As time goes on, if I can make a tweak that can work better for me, it is definitely on the table, and why not improve when I can?

Then again, you may hate every part of the system, and wish you had never visited this post. Oh well, now you'll know what not to do! 


Though this is not a conventional budget where every dollar has a "home", I have set it up to where I am adding to my savings every week, and I use a spreadsheet to guide me. Some may choose a monthly process, whereas others may opt for a bi-weekly process / once per pay period (assuming you're not one of the few that get weekly paychecks still). 

Why do I do this? 

Nothing scientific, it just felt like a good interval. Waiting until payday every 2 weeks, seemed a little long for me. Fridays are good for lots of things, so why not add to my savings every Friday? Plus it gives me something to get excited about, even when additional money is not coming in (well, aside from any dividends that may be trickling in at that time). I like my routines, and weekly seemed like a good interval to use. 

Some general facts about my situation:
  • I get my paycheck every 2 weeks (well, virtual paycheck, via direct deposit).
  • I love credit card rewards, whether they be for travel or cash back, so 90% of my spending is with cards that have good rewards programs (Why not get rewarded for my spending?).  Some key caveats here: I pay off my balances in full every month, and where possible, I pay them off after each pay period (every 2 weeks). Zero balances and positive rewards coming my way are a beautiful thing.
  • I am currently overpaying my car loan each month, to pay it off more quickly.

Starting with the virtual paycheck, I max out my 401k immediately. This is how I pay myself first, as the saying goes. I was late in realizing this, but I could have done this years ago. However, I was spooked by the fear that I would not have enough left over to cover my bills. Clearly I did not compute in detail what my remainder would be after taxes are withheld, otherwise I would have realized how silly this fear was. I might have been miles ahead of where I am right now. But I digress...

In my investing spreadsheet, I dedicate a tab to this process of determining how much I will save each week. 

In the current pay period, I enter my current checking account balance, as well as my savings account balance with the same bank. I use this savings account as a temporary savings account to be almost emptied and replenished every payday (I keep my emergency fund in a separate online higher yield savings account). I'll explain later. During each pay period, I keep about $260 in this savings account. The spreadsheet will add up both balances to determine the money available to work with for the rest of the current pay period.

Then, I record current Credit Card Balances on the spreadsheet. I also record the bills that will be paid from my checking account during the current pay period (ie, car loan, electric bill, car insurance, rent, etc.). The spreadsheet adds all these up to get a total for expenses for the current pay period. 

I think you start to see where I am going with this.

I then record a miscellaneous amount I expect to spend between the current day and the next payday. Obviously the closer I am to payday, the lower this number should be. 

Every Thursday I make sure to hop on this spreadsheet to give it the proper update of info, and compute my surplus for the week. What is my surplus? It is simply:

Surplus = Bank account balance total (checking + temp savings) - total expenses - Miscellaneous spend estimate

Then a little fork in the road. 

If the next Friday is not payday, I divide my surplus in half (to leave some surplus for the following week until payday arrives). If the next Friday is payday, I keep the surplus as is.

When Friday arrives, I use the following breakdown 
  • $106 goes to my Roth IRA (basically works out to the $5500 limit at the end of 52 weeks)
  • 70% of my surplus - $106 goes into my taxed brokerage account for Dividend Growth Investing. To enable a weekly deposit and purchase of stocks/ETFs, I currently use a brokerage that charges no commissions. If they did charge commissions, I would likely keep a cash position until I had enough to where it would be reasonable to purchase stocks/ETFs.
  • 30% of my surplus goes into a separate online high yield savings account. I use this account for my emergency fund, and then any additional money is to accumulate to jump in on a quality stock that quickly becomes undervalued (FLO, otherwise known as Flower Foods Inc, being the latest example where I did this).

I "pay myself first" with the 401k, but the rest does not get determined until the pay period ends, which kind of goes against the spirit of the mantra, but oddly enough, this system has helped me stay consistent with my saving.

When payday arrives, I do the following
  • Transfer $250 from my temporary savings into my checking account (my checking account has an automatic setting to transfer $250 into that savings account. It's a psychological thing for me, to make sure at the very least that $250 will be available to save every pay period)
  • Pay off all credit card balances
  • Allocate the calculated amounts to my Roth IRA, taxed brokerage account, and the separate online savings account as indicated in the spreadsheet

With this system, I am able to maintain a 40-45% savings rate usually. My goal is to get to 50% and above, but not quite there yet.

There you have it. However, such explanations are better clarified by an example, so I will include one below. The numerical values have no bearing in my reality, but they are there for illustration.

Let's start with the following assumptions for a current pay period (also assume it is a random Thursday):
  • Combined in bank account: $1000
  • Combined CC balances: $300
  • Bills to be paid from my bank account(s): $150
  • Misc remaining spending: $100

I then calculate my surplus as: $1000 - ($300+$150) - $100 = $450

If the next Friday is not payday, this surplus becomes $225 (I divide $450 by 2)

If the next Friday is payday, this surplus remains at $450

For simplicity, let's assume the next Friday is payday, so using a surplus of $450, the savings allocation breakdown goes as follows:
  • $106 goes to my Roth IRA
  • $209 goes into my taxed brokerage account (70% of $450 - $106)
  • $135 goes into my online savings account (30% of $450)

So onto the elephant in the room. What happens when there is no surplus?

If there is no surplus, then I try to be disciplined, and unfortunately I do not add to my savings for that pay period (aside from the 401k). This does not happen often, but it has happened. The exception is when this is due to an emergency purchase. In this case I would draw the amount from my online savings, and transfer the amount into my checking account, and use that new amount for my checking account in my surplus calculation. It has to be a real emergency for me to do this.

When I am not able to add to my savings for a particular pay period, it actually serves as a great motivator for the following pay period to do better and generate a surplus. In a way it's my own "earnings report" every 2 weeks! When it comes out zero or negative, I know that I did not do well for that period, and that I need to do better for the next pay period.

So there you have it, my saving system. As I said, it has kept me on track, once I started getting serious about my finances last year. 

What is your system for saving, and does it work in keeping you accountable? I would love to hear what others do in this regard. Let me know in the comments below!

2 comments:

  1. Awesome that you max out 401(k) and IRA. It won't take long before you see huge gains! Congrats!
    -Brian

    ReplyDelete
  2. Thanks Brian, yes that's when I started seeing real retirement account momentum! All this helps to push me forward, and the progress has been remarkable.

    ReplyDelete