Use Purpose-Driven Investing to Achieve Your Goals
Published on - August 8th, 2006 (Modified on - October 28th, 2009) (by J.D. Roth) Do you save for one thing at a time? Or do you pursue several goals at once? If you’re like me, you work toward several financial goals simultaneously, but you keep most of your money clumped in one account. It’s easy to forget how much you’ve saved for each goal. And it’s easy to borrow money from one objective to pay for something else.
In his forthcoming book The Six-Day Financial Makeover, Robert Pagliarini advocates Purpose-Driven Investing:
Traditionally, most people invested for various vague goals and lumped all of their savings together in a single investment account. That’s pretty boring. It’s not very inspiring or effective.
Purpose-Driven Investing satisfies our need for a purpose and our need for instant gratification by thinking of each of our goals as a separate “basket”. Each of our baskets represents a single goal with a clear purpose that we can see and grow.
What does this mean in the real world? It means that we have a single investment account for every goal. For example, if one of your goals is to take the family on a European vacation, create a separate savings account called “Family European Vacation Fund”. This account or basket contains all of your savings toward that one goal. Every penny in the account is for the European vacation — not for retirement, a new car, your emergency fund, your kids’ college tuition, or any other goal. What was once just a plain investment account is now a dream — a real goal you are committed to achieving. Account statements have been transformed from boring pieces of paper into exciting treasure maps!
In a way, Purpose-Driven Investing is like envelope budgeting, but on a larger scale. Pagliarini argues that Purpose-Driven Investing offers several advantages over traditional methods:
- It’s modeled to your personality. You’re able to customize your plan to your goals and your risk-tolerance.
- It’s intuitive. Pagliarini says that this sort of saving is like that we did as kids: if we wanted a new comic book, we saved for it. If we wanted a bike, we saved for it.
- It’s easy to track progress. Because each goal has its own account, you know how close your are to reaching it. When money is mixed in a single account, there’s no easy way to see how close you are to individual goals.
- There are fewer risks. Each account is tailored to the timeline required. If you’re saving for something near-term, you use the appropriate account. If you’re saving for something in the future, you use a riskier account.
- You have a better chance of reaching your goals.
- It’s easier to prioritize goals. When your goals are broken into separate accounts, it’s simple to allocate money between them monthly. If you know you need to buy a car soon, you can prioritize that account. If you really want to max out your 401k, you can prioritize that account.
“Do what works for you,” I always say — when I read Pagliarini’s advice, I knew his method would work for me. Because I’m only a novice investor, I decided to apply the idea to my personal banking accounts, to pursue Purpose-Driven Saving.
I stopped by my credit union last week and opened an additional free savings account. “I have an extra savings account, too,” the teller told me. He leaned forward. “I’m saving for an XBox 360,” he whispered. I laughed and told him the truth: my new account will first be used to save for a Ninetendo Wii.
Here’s how I’ve set up my accounts:
- I have a checking account for daily use.
- I have a high-interest joint savings account with my wife (we keep separate finances for everything else) that serves as an emergency fund.
- I have a primary low-interest savings account that I use as a holding tank for money as it’s transferred here-and-there.
- I have a secondary low-interest savings account for short-term goals. (This is currently my Nintendo Wii fund, and contains the money I earned at our spring garage sale.)
- I have a business savings account that I use for medium-term goals (primarily technology purchases). I’m currently saving to purchase a replacement computer — my goal is to purchase a MacBook Pro by September 2007.
- I have a Roth IRA with Sharebuilder. (Ad: Buy Stocks for $4 at ShareBuilder.
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- I also have one remaining (non-mortgage) debt: a home equity loan. This isn’t an investment account, but paying it off is part of my personal purpose-driven money plan.
These accounts don’t earn optimal interest rates, but they’re what works for me. I’m excited about this new way of looking at my money. I have high hopes that this method will help me achieve my financial goals more quickly.
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I have a similar set-up at ING Direct–one savings account designated “Christmas” that is set up with an automatic monthly withdrawls from my checking account, another that I deposit my spare change into (my credit union cashes out change for free, as long as it is under $100) designated for a trip to Europe, another account in which I am saving for a nice digital camera. This is the only way I can keep my balances straight and save for specific goals.
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I think this is great advice — with one caution.
Banks often set up savings account minimum balances to maximize their “fee revenue” — that is, the amount they charge you for not meeting one of the rules of the account. If you’re not careful, you can lose a lot of money to fees, and you might make the mistake of blaming yourself instead of the bank.
I once set up a Washington Mutual savings account, and they told me the minimum balance was $1,000. I put a little more than that in the account. At some point I needed to withdraw a bit from that account, and it went below the minimum. For months, I would get a $10 “low balance” fee charged against that account, and I’d blame myself for not doing a better job of saving.
Finally I brought the account over $1,000, and waited to see the fee go away the following month. But it didn’t. “Oh, I must have deposited too late in the month,” I thought. The next month, the fee was still there. What the hell? So I called Washington Mutual, and they said, “We raised the minimum balance to $3,000.” Aha. That’s quite a trick! (It would be called “bait and switch” were in not for the miracle of fine-print terms & conditions bill inserts!) Now I have my savings in a bank with no minimum (USAA — in my experience, a great bank).
If you set up separate accounts for your goals, make sure you know exactly what the terms of those accounts are, and set them up with banks that not only have high interest, but also have fee schedules that aren’t going to bite you. If you start hitting fees, blame the bank, not yourself, and take your business elsewhere.
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I love this concept; before I operated separate accounts, I had nothing more than a hunch as to whether I was actually getting ahead or not. Keeping your emergency fund and your vacation fund in the same account is not wise, lemme tell ya.
I’ll add another caveat to what Marc Hedlund said: Don’t get too fidgety with transferring money between accounts. I did that and ended up getting a nasty-gram from ING:
What I’ve done instead is set up fake savings accounts in Quicken, then do a “transfer” from my real ING account to one of them. This way, as my priorities change, I can shuffle cash around from one virtual account to the next without having to worry about anything except my own self-discipline (a sufficiently difficult task on its own).
Of course, this isn’t for everyone. Personally, it doesn’t bother me that I have to take extra steps in Quicken when I go to balance my savings account or to make a withdrawal from it, but I can see how that might grate on others’ nerves.
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Maybe I just need to read the book to get the full insight. I’m sure this may work for some people but I find that just a few accounts (money market, aggressive stock, bonds, etc.) work well for me. Subsequently, my wife and I easily maintain an excel spreadsheet with a listing of 20+ goals for saving with a bucket for each such as ski trip, kitchen remodeling, etc. Again, this works for us. I like keeping matters simple and manageable. Just my thoughts. Maybe I will pick up the book to get the full insight.
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[...] Aug. 8th: Use purpose-driven investing to achieve your goals [...]
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[...] Last month, I posted a comment about bank fees on J.D. Roth’s fantastic blog, Get Rich Slowly. (Get Rich Slowly is probably my favorite of the personal finance blogs — J.D. combines excellent, level-headed advice with frequent updates, and has drawn a strong community around the blog as a result.) The comment was about how Washington Mutual made off with $180.00 of my very favorite dollars: I once set up a Washington Mutual savings account, and they told me the minimum balance was $1,000. I put a little more than that in the account. At some point I needed to withdraw a bit from that account, and it went below the minimum. For months, I would get a $10 “low balance” fee charged against that account, and I’d blame myself for not doing a better job of saving. [...]
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I was planning on setting up separate savings accounts, too, on ING Direct. When I went to their website to set it up, I found that they couldn’t link to my Fidelity brokerage account (which has an associated checking account), even though I used to have it set up that way. I like the idea of ING because it’s easy to set up multiple accounts. Does anyone have suggestions for other online savings accounts that make it easy to set up multiple accounts for different purposes?
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I have several accounts on ETrade, and that works pretty well for my savings goals. I have an investment account with a few mutual funds, a money market checking account, a CD, etc. It’s very easy to move money between them when necessary, but it does take 3-5 business days to see money transferred from an external account.
Beware of fees, though!! There are definitely minimum balances to maintain and 6 maximum internet transfers per month, etc.
Another note on moving money around in savings accounts, this one with US Bank: As majeest said, I got a little over-excited one month about meeting so many savings goals that month, and began moving money in chunks so that I’d remember which transfer went with which goal. I thought I was just organizing myself when in reality I was building up transfer fees for my bank. Of course they didn’t charge me for each transfer, like an overdraw, they waited until the end of the month and THEN took away $115 of my savings, $15 each for every transfer over the 6 allowed!!! When I called the bank very upset about my missing money, they had no sympathy and I ended up closing my account in a fit of rage. If I had known I was over the limit by seeing the $15 dollar charge, I would have stopped transferring money right away, but instead I had no idea until the end of the month. Gotta love the fine print!
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[...] 2. Set a clear goal. If you save for a particular goal, you’re more motivated to stick to the plan. Recently, I’ve been using purpose-driving investing. It works like a charm. [...]
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[...] I opened a separate targeted savings account at my credit union specifically for this goal. But I was wary of making a foolish purchase. I didn’t want this to be an impulse buy. Using the principles of the 30-Day Rule, I told myself that if, after six months, I still wanted a Wii, I would buy it; otherwise I would use the money to buy Christmas presents. [...]
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