Part 2 of Side Accounts: What Are They and How to Use Them

How do you convince Monkey Brain to save for the holidays?

By Jason Hull
Hull Financial Planning

The best way to make sure that you’re setting aside money for your irregular but recurring expenses, such as the holiday season, vacation, a car replacement, insurance payments, health care deductibles, and the like, is to hide money from yourself.

Hide money? Am I telling you to go stuff money in a mattress?

Not exactly. Plus, if you did that and the house burned down, good luck convincing the insurance adjustor that you had a few C notes stashed away in the box springs.

Instead, what we do is set up a separate account for setting aside that money. It’s different from the account where you get your paychecks deposited into. Theoretically, it should be more difficult to access money from this account so that you don’t go spend it in a wild bender of a shopping spree, so, depending on how much self-control you have, this could mean going to another bank for this account.

Here’s what I look for in a good side account:

·    Free checking - You shouldn’t pay a fee for this account. You don’t want to give the bank money every month just to hide money from yourself.
·    No minimum balance requirement - There is an opportunity cost to storing that money somewhere, because it could be used in investing and saving, so you don’t want to lock up even more money. Now, we do keep more in the account than is necessary in case I have a case of Monkey Brain playing with the calculator and miscalculate, but we don’t keep too much buffer in there.
·    Free bill pay and unlimited number of transfers - This is crucial for a reason I’ll explain in a minute.
·    Clean, concise, easy to use online system - You’ll be transferring money in and out of this account, so you want to make sure that the website is easy to navigate lest you send the wrong amount of money to the wrong place.

Why did I make the case for the free bill pay and unlimited number of transfers? It has to do with mental accounting.

According to recent research from a team led by the University of Utah’s Himanshu Mishra, people who make payments from a single account spend less than people who spend from multiple accounts. It’s because we can’t keep track of all of our spending and tend to assign different categories to different accounts. The fuzzier the math becomes, the easier it is for Monkey Brain to slip in unwanted purchases.

If you think you have the discipline to have your main and “side” accounts at the same financial institution, when you need to make a one-time purchase, transfer the money from the side account to the main spending account. The key is to make sure that ALL of your bills are paid from the same account and that ALL of your spending comes from the same account. According to the University of Utah research, this could mean you wind up spending 10% less than you otherwise would.

How do you know how much to set aside?

I think the easiest way to get in the right ballpark for how much you need to save is to use what you’ve spent in the past 12 months. You can find out how much you spent on vacations, on gifts, and the like, and that’s a pretty decent starting point. You may find that you spent <em>a lot</em> more than you expected to, so the review is a pretty good practice regardless.

There are some items which may require a little more guesswork and cushion. A good example is a replacement car. Let’s say that you have a ten year old car. It’ll probably go in the next five years, but it might last another ten. Who knows? You know that your budget for a replacement car will be $15,000. Given that you expect to replace the car in five years, which is a sixty month timeframe for buying the replacement car. $15,000 divided by 60 months is $250 a month.

However, you’re keeping multiple “side accounts” in one actual account. How do you keep track?

We transfer the total amount over each month and then log the side accounts on the same spreadsheet we use for our budget. That way, we keep a running tally of how much we’ve set aside for all of our different categories. Our list includes:

·    Home insurance
·    Auto insurance
·    Holiday and birthday gifts
·    Auto maintenance
·    Property tax
·    Travel
·    Healthcare deductibles
·    Car replacement
·    Furniture
·    Annual gym membership

Then, when the time for the payment for something in one of these categories comes around, we simply transfer the money and make the payment. Voila. By setting aside a little money each month, we’re keeping ourselves from having to dip into emergency savings when these items come, protecting our emergency funds for true emergencies.

This process will take a couple of months to get used to. You’ll probably think that there’s money missing and you’ll feel tight. However, due to another psychological process called hedonic adaptation, you’ll get used to the new budget and the new spending patterns, and, in the future, you’ll go through a lot less stress when the bigger bills come.

The holidays come once a year. From now on, you’ll be ready for them!

Jason Hull is a candidate for the CFP(R) Board's certification, is a Series 65 securities license holder, owns Hull Financial Planning, a CVE-certified service-disabled veteran-owned small business, and is an Army veteran. He is also a personal finance columnist for U.S. News & World Report. 

Read Part 1 of Jason's article here: Side Accounts, What Are They, How to Use Them and a Psychological Trick

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