For today’s post I’d like to share with you a tool that has really helped me grasp the concept of saving for retirement.
Compartmentalization
Separate Accounts
– Don’t keep your retirement money in the same account that holds your emergency funds
– Keep everything you’re saving for in separate accounts
– INGdirect.com allows you to create multiple accounts online
,
Equity Goose
– Keep an “Equity Goose” (read “The Equity Goose and the Cash Flow Golden Egg” for more information) that you never take money from
– Only use this money to invest in assets that will cash flow
Emergency Funds
Most people have one savings account that they use for their retirement as well as for their emergency fund. But what ends up happening is they’ll save and save and save until an emergency happens and they have to draw the account down.
Then they try again- saving, and saving, and saving, until they decide to go on vacation. After this next dip, they continue to save until another emergency occurs, like they lose their job. So because their retirement account doubles as their emergency fund, it never builds and never benefits from compound growth.
Equity Goose
The solution is to make sure you have at least two savings accounts. One will be untouchable- what I like to call the “Equity Goose” (see below for a link to another article describing the Equity Goose). The Equity Goose is basically cash that you never access. The only function of that cash is to produce more cash for you either in an interest bearing checking account or through real estate or another investment.
So now you have your long term equity goose which just continues to grow exponentially and your short term accounts for all other things. You should have a separate emergency account that will naturally rise and fall as emergencies happen, and separate accounts for everything else you’re saving for like vacations, a new car, or college educations for your children.
This is what’s called compartmentalization. Remember that the key is having one account that you can never touch. The only purpose of that account should be to buy assets that produce cash flow for you.
Separate Accounts
A really good resource I use is a bank called INGdirect.com. I don’t make any money from advertising with them, but what I like about them is that they have a higher interest rate (right now about 1.5% which is really high compared to most money market accounts). The other thing I like about them is that they let you open up several accounts online just by clicking a few buttons. This is a lot more convenient than having to sit down with a banker and getting funny looks when you want to open 6 accounts.
So that’s what I do- I’ve got my Equity Goose account, an account for vacations, and separate accounts for asset type goals or things that I want to buy.
I hope you’ve learned from this tip. If you can learn how to compartmentalize your accounts, it will make you a lot more money in the long run and set you apart from 90% of Americans.
This is good advice. I’ve been doing this for years.
My bank in Australia lets you set up free online accounts, with about 4.5% compounded monthly if you don’t withdraw.
I have a account for:
Gifts
Car
Short Term Savings
Long Term Savings
Business
I also have a main account which all money goes into first, and direct debits come out of. Whenever this account gets above a certain amount I trim it, putting the excess into the short term savings account.
I also set up regular scheduled transfers from my main accounts into my car, gifts and business accounts. This means that when it comes to christmas or birthday presents, car maintenance etc, I have a healthy account to draw without having to worry about cutting into my main savings accounts.
Another main account is my expenses account. Nothing comes into or out of this account except what I use on my card or transfer manually. This allows me to have a card on my wallet for everyday expenses, and since I have to manually transfer money into it, it gives me an idea of what I’m spending(throwing away) on everyday junk like take-out, alcohol etc.
My system isn’t perfect, I’m open to suggestions. The only accounts I have to pay fees for are the two main accounts. I could probably turn the non expenses account into one of the free online savers, but it’s good to have a card for the account that I can use for big unexpected but important purchases.
I also get funny looks from the bank or government when I have to show them I have 6-8 accounts.
Can I add another tip? In order to save money, I usually leave behind my credit cards and ATM cards at home. If I need to buy something, I just bring enough cash. 🙂 I hope this helps!
Great advice!Thanks for the video
Hi Brian,
Have not checked your blog in a while but I have been reading it since way back when. Even before your metacafe cat posting experiment (which I also tried and made small money with.) Anyway, just wanted to say thanks for putting this together. I also use ING and I do the same thing, I find it helps me keep tracks of things better. If you can keep 50K+ in a single CHECKING account with ING the interest rate is actually higher than the savings rate. A good tip to keep in mind for your larger untouchable account.
I see you have really honed in on real estate. Are you still trying experimental projects in the market, with video, and with vending machines, etc? Or, have you decided to focus mainly on this? I am still looking to use experience to build a start up but my day to day consulting eats up a ton of my time.
Thanks again,
Hey Dan, good to hear from you.
Thanks for the ING Checking tip. I will definitely use that.
Real estate is simply what made me the most money with the least amount of effort. I’ve still got a few experimental things going. Hope to share them over the next few months.
Ally is a good one too. I’ve got 4 accounts through them.
Thanks for the recommendation.
Thanks Brian. Very good advice on the liability issues. Any interest in posting on those issues or do you have a recommended reading for it?
I don’t have any reading that comes to mind, but that’s not a bad idea for a post.
Good tips. I’ve seen several other personal finance related blogs promoting ING direct accounts as a best method for automating finances.
Just curious, how do you organize your sub accounts?
BTW, just read your post about the equity goose. LOVE IT.
Hey, thanks!
I’ve got around 6 accounts. 1 is the “equity goose”, 1 is my emergency account, and the others all relate to a specific goal such as buying a car or going on a vacation. As the goals get accomplished, I change the account nickname and replace it with a new goal.
Brian,
Great advice to keep separate accounts and use INGdirect! One question, do you perform real estate related transactions through that Equity Goose or do you do it all through a separate company so as to avoid liability issues with your personal accounts? In other words, do you shield you personal accounts in some manner?
Hey, good question. The money comes out of the INGDirect account just long enough to transfer into a checking account to buy a piece of real estate.
Most of my properties are in and LLC now, but that’s mainly because I buy with a partner. An LLC is a must with partnerships, but if you’re buying on your own, you can cover most liability issues with a $500k liability insurance policy on each house and a $1 million umbrella policy over all of your properties.