Free From Money

This post is part of the financial basics series.

How often do you see advertisements saying $19.95 a month? How often have you thought to yourself that you could “afford” a new car since the lease payments are only $299 a month? Did you eye that new Macbook Air and think it could be yours for only $100 a month? If so you’re not alone. According to Bankrate.com, the average credit card debt is $8400 per person. On top of that, PBS estimates that there are roughly 641 million credit cards in circulation. That’s a lot of plastic.

Buying on credit is a dangerous game, especially when you start thinking in terms of monthly payments. What happens if you can’t make the payments one month? What would you do if you lost your job and couldn’t make the payments anymore?

How do you break out of that cycle?

What if instead of paying $100 a month to finance a new laptop computer, or $300 a month for a new car, you managed to break the credit cycle, and instead started saving for the things you wanted? What if instead of paying interest, you could begin to earn interest? If you could do this, you would be able to start affording a lot more stuff. It will take some time, yes. And discipline. But I promise the results will be worth it.

Setup sub-accounts with ING Direct

There are many online banks that offer higher interest rates than ING Direct, but I have never used any of them. I have been a customer of ING since March of 2004, and have had nothing but great customer service from them. I don’t have any experience with other online banks, so I don’t know if they have similar features. But if you’re looking for an online bank I can highly recommend ING Direct as a safe, FDIC-insured option.

One of my favorite features of ING is the ability to create sub-accounts. A sub-account is basically a separate savings account, each with its own account number, underneath your customer number. Using sub-accounts is a great way to budget and visually separate your money to more easily reach your goals. Every time you log in to your ING account, the main page will list all of your accounts for easy maintenance.

To open a new sub-account, simply log into your account, and click on the open new account button on the left-side menu. Choose to open a new Orange Savings account (click on the Open Now button), enter the account nickname, choose your existing savings account, put a few dollars in your new account, and then hit continue. Confirm that everything is correct, and then click “Open Account.” The whole process only takes a few minutes and shouldn’t present any problems.

Making use of your new sub-accounts

Now that you know how to open a sub-account, you need to know what to do with them. First, think of the things you would like to begin saving for, the typical things people put on credit cards or go into debt over. A few examples might be a new computer, vacations, clothing, or even Christmas gifts. Don’t forget big purchases like a car. Imagine if you bought all of these on credit. You would have a car loan and a credit card that you bought your computer with. You might have another credit card that you use to buy your clothes and gifts with, and yet another card that you used to go on a trip to Hawaii. Opening a few savings accounts that are all available in one place doesn’t seem so bad now, does it?

Consider again the things you would seriously like to save for, and open an account for each one. If you plan on buying a new computer every two years, open a computer savings account for example. Combing goals is also an option. For instance I only go clothes shopping once or twice a year, and I only buy Christmas gifts once a year. So I created one account, and named it Clothing and Gifts. Think of these accounts as your new debt payments, only now you’re the lender and you’re in control.

Once these accounts are open, you need to start thinking about how much you’re going to need total, and from that figure out how much you will need to contribute monthly. Let’s look at the new computer fund. Suppose you want to buy a new laptop computer every three years, along with a few accessories like a new external hard drive or new software. First factor in the actual cost of the laptop, say $2000. On top of the $2k you want to get a protection plan and upgraded ram. This might add another $500, bringing your total to $2500. Don’t forget to add sales tax! Including tax and the software you think you might buy, suppose your total number comes out to $3,000. So over the course of 3 years you will need to save roughly $83.33 a month to meet this goal. By the time you save that much money, you will actually have more than $3k, since you will be earning interest on the money while it sits in your account. I will talk about how you can use this to your advantage in another post, but for now just think of it as compensation for your hard work (but try not to spend it!)

One trick I like to use, when naming your account, put the amount of money you would like to save next to the name. So the computer fund for example, would have the nickname “Computer Fund 3000.” I know that sounds like the name of a bad science fiction movie, but seeing that goal every month, and seeing the balance get a little bit closer to that goal every month, will provide you with the motivation to keep saving for that goal.

Don’t forget to start an emergency fund!

The number one sub-account you absolutely need is an emergency fund. This is going to be your shelter from the storm, your rudder keeping you steady when the water gets rough. This account will be used for emergency expenses, like unexpected car maintenance costs or medical bills, sos you don’t have to pull out the credit card. Buying a new shirt to impress your date Friday night is not an emergency, so be careful not to use the account frivolously.

Final thoughts

Using the sub-account feature is a great way for you to budget for your goals, and to budget for annual expenses like Christmas or your kid’s birthday. But when you’re just starting out, don’t over do it. Building up a small emergency fund should always be first on your list. After that it’s important for you to pay off all of your current debt before you start trying to save a major amount of money. It wouldn’t make much sense to save for a new car when you haven’t even paid off your current one.

Using ING you can set up an automatic withdrawal every month or every paycheck, giving you an easy way for you to fund your accounts. Don’t forget to budget those withdrawals, or you might spend that money and get hit with overdrafts. Now go open those accounts!