My Killer Financial Tool: The “Secret” Savings Account

I frequently refer to my “secret” savings account, but realize I haven’t really written about it explicitly. Since I consider it one of my key tools to managing my finances over the past 10-12 years, I think it is time to review how it works and how important it has been.

Just to be clear, I am not advocating hiding money from your spouse; that is not cool in the least.

Instead this is an extra account to “hide” money from myself–which is sort of silly, because for sure I know I where these savings are. But the account is in a separate institution from my checking account, and it’s difficult to check the balance, so I don’t think about it very often. This means money accumulates without any effort on my part, growing steadily month by month.

Today I will finally describe all the ways this account has helped me since I started my “grown up” job, and encourage you to try this as well. Especially those of you just starting in a new position this summer, with a new (hopefully bigger) salary.

An Easy Way to Pay Yourself First

I started this special savings account when I started my current position.

Reading my papers at orientation, I learned that I could easily join the local credit union. More importantly, I had the option to split my paycheck and send an smaller amount directly to the credit union savings account, while the rest sped off to my checking account, from which it could be spent.

I know this feature is more commonly available nowadays, but back then this was mind-blowing!

Instead of having to remember to save money every month, I could skim this money right off the top. I was free to spend whatever hit my checking account every month. No muss, no fuss, no figuring out what was left after paying the bills.

If I really need to pull money from the account, I can do it, though it involves a few steps: requesting a withdrawal, presenting to the credit union office to pick up my check, depositing said check in my bank account, and waiting for the funds to clear before I spend them. This is usually a process of 2-5 days. As you can see, it takes a little effort to get at this money, so I only dip into it rarely.

Benefit Number One: Saving for Big Ticket Items

Over the years this “secret” money has worked hard for me.

First, it helped me buy a house. Putting money away every month padded my down payment fund considerably. There was even enough left over to pay for wedding rings.

A few years later, my monthly savings had re-accumulated enough to cover some elective medical expenses.

All along, I was saving for a new car as well. When I had problems actually using the money to buy our new car (we had a time crunch), I applied that money towards paying down our mortgage.

This opened the flood gates: after applying the cost of a car to my mortgage, I was hooked on reducing my balance.

Two or three times over the next few years, I would log in to see how much my account had built to, decide how much I could spare, and jumped through the hoops to get this money into my checking account. From there, I wrote some very large checks, with the result that I knocked off my mortgage over 20 years early.

Since then, my savings have been growing, untouched. There is enough to buy another brand new car if we want (we don’t right now). In another year or two, we will have more, unless I pull the trigger on buying a new piano.

Overall, I would say this money has helped fund my dreams: a house, a car, the end of a mortgage.

Benefit Number Two: Regulating Spending and Slowing Lifestyle Inflation

Saving this money is great not just because I have a stash to use for big purchases. It also acts as a bit of a safety valve for my budget, keeping my monthly spending steady and helping me avoid lifestyle inflation (a bit).

When I first was married and we had a kid in college, I had to cut back on my contributions to this secret account. It just costs more to support 3 people in 2 households, and I needed more in my checking account.

Once college was finished, I increased my contributions by almost as much as we had been paying for room and board. This encouraged me and Mr. PiN to keep our monthly spending in check, but with a tiny bit more to enjoy. No need to sacrifice quite as much now that the kid had graduated.

Several years later, I did something similar. A few months after we paid off the house, I noticed we were spending the entire paycheck every month, even though the mortgage payment was gone . A few clicks, and more money was diverted to savings. Voila! The deposit in our checking account was closer to our prior spending, we naturally cut back on purchases, and we have done just fine since.

I imagine once we finish paying off our car (very soon), I will repeat the process: increase our monthly savings by nearly the amount of the payment, while leaving a little bit more for our spending. A small raise, so to speak.

A Theoretical Drawback

One issue with this plan is that the money is going into a savings account. These days you earn hardly any interest, so eventually this money will lose buying power (thank you, inflation).

This makes the secret savings account best for short to medium term goals: a car fund, a house down payment, a honeymoon.

I would point out that this savings account isn’t great for long term goals, like college funds for your toddler, or retirement. For these goals, inflation will eat significantly into your buying power, and you should be investing these savings given your time horizon of 15 to 30 years.

My “secret” savings account is in addition to my retirement account and the 529 plans for my niece and nephews.

Changing Goals

Some time soon, I may decide there is enough saved in my secret account. At that point, it will probably be time to see about splitting my paycheck again, now that I can do this more easily than 10 years ago. I could divert most of my secret savings to taxable investment accounts, to help fund my retirement, and just trickle a little in each month.

Or maybe some new dream project will present itself, prompting me to save a bit more in cash.

Or, maybe I will decide I want to go really part-time, and will readjust my contributions to this secret account downwards, to keep my spendable income constant while I work less.

Any or all of these choices will be made much easier because of my “secret” savings account. I hope you will think about setting one up for yourself, to enjoy the flexibility and choices that it can allow.

What do you think? Do have a different way you pay yourself first?