I have shared the logic and steps I took to establish myself as a saver and will continue sharing more ideas as they relate to savings and life. However, as much as I have spoken on the topic, it is time I started venturing off into my basic approaches to investing some of the money saved.
Before I go into that, and since it is true that a picture is worth a thousand words, I thought it may be helpful to share by diagram what I have been communicating in regards to the financial structure of a saver. Remember that these are my approaches and they work for me, so please consider making adjustments to suit your situation.
The two images below show two scenarios that should be self-explanatory but I will go into details. The first (A) is a representation of the money flow in the initial stages of saving, while the next (B) demonstrates the intermediate. I will try to cover advanced later on.
The initial stage image (A) presents the idea of money-flow from its source to my main checking account. I consider this checking account to be my central hub of transactions. In these initial stages, I move money from that checking to the savings at the same local bank. This savings account typically pays next to nothing, but because it is a transitional process, I find it comforting to have it until I can wean myself off of the convenience.
Money is also automatically transferred to the other institution, which for me is an online institution, where I initially opened three to four accounts, as noted in the image. One can choose any mix of accounts they see as a priority, but for me, a place to accumulate money to invest as well as emergency funds is important to have. Note that there is no checking account at that institution at this point.
The second image (B) displays what I consider an intermediate stage, where I am now disciplined as a saver and want to start doing more with my money. Take notice that there is no longer a savings account at the local bank but rather just a checking. This allows me to make as much of my money work for me as possible, even if it yields just an extra $1 a year. Furthermore, because I am now a disciplined saver, there is now an additional checking account at the same institution as some of the designated accounts. This allows one to move money expeditiously when it is needed.
Institution 2 holds accounts with funds that are for planned withdrawals
(Taxes, Insurance and Vacation), while some are there for conservative growth (Long term savings and various CD’s). Since the withdrawals are planned, I have enough time to transfer those moneys to my local checking for use. Institution 2 also provides me with a backup plan, just in case I start losing my discipline and abuse the funds in Institution 1.
The reason for separating money as seen above is to allow the accounts to act as a virtual accountant. If I want to go on vacation but there is not enough money in the vacation account, the account is actually telling me that I cannot go or I have to choose a vacation that the designated funds can cover. It is also letting me know that if I want to have a more expensive vacation, then I have to find a way to increase the automatic contribution to the account.
In an earlier post, I mentioned starting with $5 and increasing it as deemed necessary. I explained that it is fine starting with just $5 because we could easily postpone our plans to start saving and before we know it, a number of years have gone by. We should never think $5 is too small to initiate the process, and if we do, then it means we have to challenge ourselves to understand how money grows. The whole point is to start saving then increase the amount over time as we get ourselves organized.
As a reminder, one of the most important things to remember is that the movement between the main hub and the other accounts should be automatic. I cannot stress enough how important it is to make the movement of funds automatic. It is critical to achieving and maintaining a successful saving plan.
Finally, the money in the designated Investing account can be transferred out to an investment brokerage account of my choice when that time comes. This is when I would begin determining the companies I would like that percentage of my money to be invested in. This percentage of my savings will take on more risk than anything else, and so it should be a slow and thoughtful process.