The principle is quite simple: Use separate bank deposit account(s) to contain/hold money for specific purposes.
I first learned of this money management principle from one of Francisco Colayco’s articles. I immediately applied this principle to save up for my first real estate investment, consistently depositing in a separate account until I gathered enough money to buy my first house via auction.
Here’s another scenario where this principle is highly applicable.
Take Pepe and Pilar, for example, parents of Pepito who goes to a neighborhood pre-school. Last year, Pepe and Pilar had to borrow money to pay for P20,000 tuition in June 2007. As a result of the loan repayments, they paid a total of P23,000 where P3,000 went to loan interest.
This year, Pepe and Pilar were wiser. They knew they needed P20,000 for the next enrollment period. Ten months before June, they decided to save P2,000 per month for the ten months leading to June. This way, they build up their savings monthly and avoid having to borrow to pay for tuition in the next enrollment period.
How can you save like Pepe and Pilar did?
- Define your savings goal. In Pepe and Pilar’s case, their savings goal was P20,000.
- Define your savings timeline. Pepe and Pilar decided to reach their goal in 10 months in time for June enrollment.
- Determine how much you must save monthly (or every pay day) to reach the savings goal and timeline. In the case of Pepe and Pilar, they had ten months to save P20,000. They needed to save P2,000 per month (P20,000 / 10 months) or P1,000 per payday.
- Create your money container. Open a bank account (without ATM to prevent you from withdrawing “easily”). Find a bank account that has a low Average Daily Balance requirement (ADB) so that you can open even with a small sum. Make sure you are aware of other bank charges so that you can avoid additional expenses.
- Consistently save the pre-determined amount each month without fail.
- Track your progress and reward yourself (without overspending) when you reach some mid-way milestones or your ultimate goal.
Advantages of this technique:
- Maintains clarity and consistency on a goal.
- Allows you to track your progress towards your savings goal.
- Separates the savings for a very specific purpose.
- Does not “mix” your money, thus dis-allowing the use of the savings for other purposes.
You can use this technique for various purposes. Use it to save up for:
- a business
- an investment
- a leisure trip
- purchase of insurance
- savings for emergency fund
- a car
- a wedding
- or any other purpose that requires you to save over a period of time
I have a friend who keeps more than 5 savings accounts, each with very specific savings purposes. Each savings account has its own savings goal and timeline. Each savings account gets its own share of savings every pay day. They manage all these deposits through an auto-funds-transfer so that they don’t worry about manually transferring funds each pay day.
When one account has reached its “maturity date” my friend and his wife, together, would withdraw the money and use it for the specific purpose. The savings account is then freed up for another savings goal.
Have you tried this technique before? How well did it work for you? What other tips can you share?
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