Over the past week, I’ve been sharing some ideas for taking your savings to the next level. Try to take advantage of high-yield savings accounts while you sill can. With the economy in bad condition, it’s likely the Federal Reserve is going to lower the target interest rate, which will mean lower interest rates for savings accounts. Get the risk-free 5% interest rates while you still can. Compounding interest in these accounts is the acceleration that reaches “hyperdrive.”
But there is a challenge. In order to make the most of compounding interest, you can’t withdraw the money while it’s working for you. The more you don’t see or otherwise come into contact with your money, the less tempted you are to access and spend it. So here’s tip number five for putting savings in hyperdrive.
5. Hide Your Savings From Yourself
Once you have a positive approach to saving, including the prior hyperdrive suggestions of using a high-yield savings account and automating your savings, two clichés are important to remember: “Set it and forget it,” and “Out of sight, out of mind.”
While common sense says that the more attention you pay to something, the better off you are, I disagree in this case. More attention given to something that’s boring — interest accumulation, like watching grass grow — will sometimes create a frustration and a desire to do something more. Of course, investing for the long-term in the stock market will provide better returns, but for now, we’re just talking about short or medium-term saving. So if you have a tendency to fuss or futz, or if ATM access to your account introduces the desire to withdraw and spend your savings, cut off all but essential contact with that account.
I am not suggesting hiding money from your family. Hiding your money from yourself doesn’t mean you should keep accounts without your spouse’s knowledge.
1. Open a high-yield account at a new bank. Accounts at new banks are easy to forget about. By opening an account at a bank new to you, you haven’t created a habit of checking the balances online. Avoid starting this habit.
2. Sign up for paperless statements. Ensure you use an email address you don’t check often. This way you can access your tax forms and statements when you need to, but you don’t have a constant reminder.
3. Don’t include this account in your net worth. If you track your finances in software like Quicken, Microsoft Money, or Mint, leave this account out of your calculations. In Quicken, you can hide the accounts by clicking the “Customize” button at the bottom of the account sidebar. With the account hidden, you can still manage it within Quicken but keep it out of view and not include it in the totals. With Microsoft Money, Mint, and other software there is no “hide” function, so delete the account.
With your savings hidden away, your interest is free to accrue approaching light speed without interference.
Image credit: jpctalbot
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{ 6 comments… read them below or add one }
I also think that using a tax deferred account also helps to “hide” the money – there are some pretty big steps to get at it. This is one of the often unspoken benefits of retirement accounts.
Another good suggestion I’ve taken to heart: Ladder it. A good number of 6 month CDs have good rates with as low as $500. For as little as $3000 dollars, you can set it up so you have one CD a month maturing. Have your automatic investment roll right into whichever CD matures that month, and reinvest for another 6 months. The rate can at least compare to, and usually beats most high interest accounts, while still being FDIC or NCUA insured. Plus, 5/6ths of it seems locked away from you at any one time. Of course, you don’t want to do this with money you want or need to have easy access to, but if you’re trying to make your money work for you while hiding it from yourself, it’s a good way to go. Most banks will even automatically roll the CD over when it matures if you ask them to.
Downside: It requires a bit more hands on than just setting up an automatic deposit and forgetting it. You’ll have to keep track of when each CD matures and manually reinvest if you want to roll your automatic deposit in. I feel that this makes up for it by making the money feel less available and in a smaller amount by dividing it and staggering it out.
Dividend Guy & Mccy: Great ideas, thanks for sharing. CDs are good — the “penalty” you would pay for taking your money out early should provide sufficient deterrent from early withdrawals.
Re: #3
I keep track of my savings accounts, but label them emergency fund, new house fund, etc. It’s hard to buy a new tv with the money I can use to upgrade my house.
Such great advice: “The more you don’t see or otherwise come into contact with your money, the less tempted you are to access and spend it”
This is my issue, not seeing it. But Im getting past it as its helping to build more savings. Out of site out of mind.
Excellent tip! I plan on hiding my annual bonus this year (short term CD) until my wedding.
Mccy – I often recommend laddered CDs to clients who want to be able to access their cash in regular intervals and want to avoid market risk. This is an especially wise strategy for those in or nearing retirement. Current market conditions are driving more people to a bank/guaranteed soluion.