Ralph sent me e-mail last week describing a clever budget trick he picked up from a friend:
My wife and I had dinner last night with a couple of of young women we know. We talked a little about personal finance. One of the girls has an interesting idea on forced savings. She calls it “reverse credit”.
“When I want to buy something expensive, I go to the store and buy a $20 gift card,” she said. “I save these up. When I’m ready, I take all the cards and go get my new thing.”
I think this forced savings plan is brilliant, and told her so.
I’ve actually been doing something similar. Because I want to expand my wardrobe, I’ve been asking for gift cards for my birthday and Christmas. Over the past two years, I’ve accumulated $305 in “reverse credit” at Land’s End, and once I lose a little more weight, I plan to place a large order. By using “reverse credit”, I’ll be able to adhere to a strict clothing budget.
You can use “reverse credit” to save for more than just large items. You might use it to budget for your morning coffee, for example. If you want to limit your spending at Starbucks, put a fixed amount ($20 maybe) on a card at the beginning of the month. When that card is drained, you know you’ve spent your coffee budget. At the start of next month, put another $20 on the card.
You may recognize “reverse credit” as another form envelope budgeting. With the envelope system, you budget by physically placing cash in envelopes designated for specific purposes. You might have a clothing envelope, for example, or a coffee envelope. When you’ve spent all the money in any given envelope, you’re done spending in that category until the next payday.
“Reverse credit” isn’t for everyone. If you already have control of your spending, this may seem excessive. But if you’re trying to teach yourself to budget, this could be an effective way to do it.
Note: Ramit at I Will Teach You to Be Rich recently shared a similar concept: How to use a separate debit card for discretionary spending. The beauty of his system is that you can apply it to all your expenses, not just to isolated merchants like Land’s End and Starbucks.
Note #2: Be sure to read the comments. GRS readers are wary of this idea. They do not like it, and for a number of reasons. Make sure you understand the pros and cons of gift cards before trying “reverse credit”.
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How about buying $20 worth of high-yield savings account? It will accomplish the same thing with the interest going to you instead of providing an interest-free loan to MegaCorp Inc.
I get it, it’s a psychological tool, but maybe psych yourself into something more advantageous?
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I agree with PBJ. Maybe this might work for beginners but in addition to all the usual downsides of gift cards it is also not without risk. Companies have refused to honor gift cards as part of bancruptcy proceedings, see Sharper Image
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Ever heard of Sharper Image? This is a good way to screw yourself if the company declares bankruptcy. If the company you buy gift cards from gets in financial trouble, they can just stop accepting gift cards, and you are SOL. If you are going to do this, try doing it with the Visa gift cards that work anywhere Visa is accepted. Honestly, if Visa goes under, we are all screwed anyway.
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The idea is good, but gift cards are the absolute worst vehicle for it. Not only do you earn no interest, have to deal with the hassle of the cards, potentially have them expire on you or get whittled down with service charges, but if the company goes bankrupt you lose all the money.
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I did the same thing when buying my computer, only using a savings account, as PBJ suggests. As with all things financial do what works for you, but savings accounts would certainly allow you to get the best deal when its time to purchase your item by not having you tied down to a specific retailer.
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This would be a decent idea except that gift cards are terrible: depreciation and not promise that they will honor them. Like the poster two above me said, sharper image is the best example: they just simply said “Gift cards are no longer valid.”
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Heck, I even have an AMEX gift card that was refused at Banana Republic.
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@EH
Really? Did they say on what grounds? Does Banana republic take AMEX credit cards? Sounds like a story for the consumerist >.>
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You are all absolutely correct, of course. If you’re going to do this with gift cards, you need to understand the risks. The Sharper Image is a great example.
Still, I think it’s a good idea. I intend to continue doing this with Land’s End, for example.
The idea of using an online savings account is great, too. I have an account at ING Direct. Does anyone know how to subdivide this account so that I can have a “Mini Cooper” section and a “mortgage payoff” section and an “emergency fund” section?
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@J.D.
You can definitely nickname accounts, but I don’t think you can subdivide them. You would have to open multiple accounts, which would work, but your interest rate would be lower, because it is dependent on your balance.
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JD, this worked for me:
http://www.thesimpledollar.com/2007/07/18/how-to-set-up-multiple-savings-account-funds-within-ing/
They are separate accounts though, not logical partitions of a single account.
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I thought about doing this because my grocery store sells gift cards (for other stores), and they give you “fuel rewards” for every purchase at the store. So basically a $20 gift card=.20 off per gallon of fuel. I suppose I’d do it if I had something in mind to purchase with the gift card.
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I’ve created separate savings sub-accounts at my credit union called “Car,” “Home,” “Wardrobe,” etc. It’s like envelope budgeting, but with bigger numbers. It’s safer than gift cards, and I earn interest too.
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I wouldn’t do this with retailer gift cards, because they won’t fork over the cash you don’t use.
I am, however, utilizing a similar system with a $100.00 Visa gift card I got for Christmas this year. You can spend every last penny because you can use them anywhere Visa is accepted. Anyway, I couldn’t decide what to blow it on, so I finally decided to use it as my April grocery fund. Note that there is probably a small activation fee, so really, the system isn’t perfect.
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You have to be careful with this for another reason – some stores won’t accept multiple gift cards after a certain point! Case in point, Apple refusing to let you use more than 4 gift cards to buy something:
http://consumerist.com/366421/apple-still-wont-sell-you-a-computer-because-youve-got-too-many-gift-cards
It’s a good idea in theory – and I especially like the idea of using gift cards for monthly budgets, like with the Starbucks thing. But, it’s a very caveat emptor (Latin for “buyer beware”) thing.
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I’ve been using Ramit’s idea since last December and it’s working really well. Apart from the minor detail that I confused my two pin numbers on Saturday and now it’s locked
. Still, that’s not a problem with the system, just with my memory.
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I think for monthly allotments, for specific elements, this could be a really good idea. Very concrete: the envelope system for the “modern” plastic money world. I think if I were really getting worried about having enough for groceries & fuel, I might buy those cards at the beginning of the month, just to make sure we’d have enough for those 30 days. Gift cards/certificates I personally like, despite some risk of them not being honored. At least you can use as you see fit.
And, really, interest on savings accounts stink right now, particularly if you calculate the after tax value.
If you were trying to “hide” cash (????) this is a potential vehicle, too.
Just some random thoughts….
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Honestly I think this is a very bad idea, not just for myself but for many people too. Some retailers charge service fees, annual percent fees if you “dormant” the card, companies going out of business, the high possibility that the card(s) get lost, misplaced / forgotten, or stolen. I enjoy reading most of the advices on here, but this is by far the worse one in my opinion.
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Yeah, it is an interesting idea but I don’t trust stores enough to really do a lot of it!
I tend to just stick things in the savings account I have with my normal bank when I’m saving up for something in particular.
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I use a savings account to reverse credit myself. The best thing I found is using a simple spreadsheet to keep track of subdivided accounts by having different columns. I take my monthly deposit and put the amounts I want in each category and when I have an interest payment I just take the percentage and apply it to each category. So if I have 50% of my money in an emergency fund 50% of the interest goes into that category. Saves from having multiple accounts open all over to keep track of, you have one account and subdivide it however you want.
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@J.D.
Maybe you could just keep track of that in Quicken (which, I believe, you use).
When you make a deposit to your ING Direct account, you can split it in the different categories.
When you pay some of it, just assign the correct category too.
I’m just not sure that you should manage that in your bank account.
As for the Starbucks example, that’s a good idea for which you should just use a Starbucks gift card, no? Just to makes things easy to identify.
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For my high interest accounts online, I made 2. One for general savings and the other for House expenses (Utilities, Repairs, etc). I made an Excel workbook with Tabs for each.
House-Repair, House-Telephone, House-Electricity, etc. I have a ledger style for each one and on a Summary tab I have a Total which adds all the balances from each tab.
Online it’s just an account with money, but I keep track of what is earmarked for which category in the spreadsheet. Probably more work than is required but it keeps me immersed so that I know what amounts are for what and in control so I can’t spend money which belongs to another item. Plus, I don’t want to have 10 different accounts to deal with, here I have one spreadsheet with 10 tabs. Works for me anyways.
Regarding the article, if it works for you then great. I’ve got gift cards for stores that I’d have to drive several hours to use, which I never do. Result is I have found several gift cards/certificates for stores from many years ago in my file folder. Go to check balances if I happen to go to that store and it’s empty. There’s a free $25/$50 for the retailer. And I know it’s a waste of money, but with the price of gas for the drive it really is a losing venture to use it.
For those who don’t want to spend money on Excel, and no one does, use the free http://www.openoffice.org which is compatible with Excel sheets. It may goof up on graphs, charts, or anything really fancy.
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I guess I think this isn’t such a good idea because it forces you to use your money at one particular place instead of who has the best deal at the time. What if you find jeans at Eddie Bauer that you really like and are $20 cheaper than Lands End? You only have gift cards to Lands End. You can’t shop for the best price by doing this. Also, it sounds like you have had these GCs for awhile, be careful they don’t expire or start racking up fees. Many GCs will reduce the amount by a couple of dollars each month after you have had it a year or two.
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Gift cards can expire. I had a Home Depot card I got after I bought a condo. It was good for 6 months, then it expired at 5% a month.
so be careful. You may end up with a hand full of dead plastic. Then you have no credit, and no clothing!
I’ll put a line item in my budget when I want something. $100 a month, call it trip in September. Then come September, I have $900 budgeted since January.
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I’m going to agree with many previous commentators that this is full of risk…lost or stolen cards, companies refusing to honor, as well as maintenance fees that can subtract your savings. This may not apply to all businesses and all states. But, we had a gift card that we received for a local shopping mall. They took $2.50 for every month that a balance was carried on the card. It took three months before I realized this. It could have been worse, but it was irritating nonetheless.
As for the separate debit card, I thought this was a great idea until last month. We did this just for atm transactions, no checks. I figured that once the money was gone, we’d get rejected. In theory that “envelope” would be empty. However, we “bounced” an ATM transaction because not all systems are “live.” That is, some businesses can run the transaction days after you make it. So unless you keep really good records, you still have the chance of being “overdrawn” even if it is only atm transactions. Even then, I could have checked the account online and not known that my husband had made a transaction that was still pending. Thankfully, the bank says they will probably approve us for a credit back of the $28 fee. But, it was a bummer. They said that 9 times out of 10 this idea works out fine, but there’s always that 10% – an expensive 10% chance of it bombing.
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i’ve got really, REALLY bad news for you.
this is a terrible idea, for one simple reason: it IS NOT LIVING ON A BUDGET. it’s redirecting money into a different bucket. naming that bucket “gift card” does nothing.
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I have to chime in and agree with those against this idea. You’d be better off storing the cash in a physical envelope, and not just because of all the disadvantages associated with gift cards. This “trick” strikes me more as a psychological crutch – a way to stay comfortably in the consumeristic mindset while making a token effort at saving.
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I’ve set up multiple account with ING. They’re not sub-accounts, but you can view all of them when you log in and easily move money from one account to another. All you have to do is open a new account. I have my main account, one called “vacation”, and another where I deposit interest earned from a big investment. I currently have a little money transfering every week into the vacation fund, but big chunks of extra money go into the main account.
Because the ING savings rate isn’t balance dependent, you’re not losing interest by having multiple accounts. You just won’t see the large interest earned every month because it will be spread throughout your smaller accounts. It’s not much more of a hassle for me to track and I like having the easy visual of seeing how much is in my vacation account, rather than adding it up separately.
One nice thing I’ve found is that, usually, by the time I’ve actually saved enough money to buy something frivolous I have a hard time convincing myself that I want to spend my hard-earned savings!
An transfer into a savings account (even the paltry bank account) essentially does the same thing as a gift card. It’s kind of more convenient, too. Instead of going to the store to get a gift card, you can do most money transfers online at home. So, if you have an itch to buy a new dress, instead of driving to buy a gift card, just move money into an account and call it $200 New Dress.
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Anyone have an experience with a lost card? Is it basically done no matter what?
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I think it’s a great idea! I buy my hubs Bass Pro gift cards at the grocery store for every holiday and he usually takes $150 in cards in each year to get something nice. It may not be the best idea for the person who is mega rich but it is a great one for the everyday person who needs to be frugal.
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It’s also a good way to buy a gun. Set aside a $100 bill from time to time as you save. When you have enough, you pop into the shop and, well, shop. This has one other advantage. Gun shops are one of the few stores that still have a culture of price negotiation, and nothing lets you haggle like cash.
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I think this is a good idea for some people. I have had great trouble budgeting– it’s only now, having gotten into some money trouble due in part to opening a savings account, that I’m really cracking down on it. And I’m probably still going to fail. Why? Because the money is there. I can spend it if I have it. If I don’t have it, I can’t spend it. I’ll accidentally spend my savings cushion time after time, but a card is separate money. This isn’t something for most commenters here. This is a Stupid Brain Trick for people who need it. If you don’t need it, don’t use it, but also don’t say other people are idiots for relying on it when they have to.
Also, a Visa Gift Card is some trouble on its own. There’s an activation fee– there goes some money– and if you don’t know the exact amount on the card, some retailers, including Target, can’t run it.
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I think it’s a good idea if used moderately and with a logical goal in mind. I’ve used this approach to help curb my expensive Starbucks habit. I put $30 on my (registered) Starbucks card the 1st of each month and when it’s done, no more Starbucks for me. Before I started this I had trouble keeping track of all my Starbucks purchases and entering them into my budget was annoying. Now I only make one entry. I also gradually lower the amount.
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The use of a separate debit card for discretionary purposes sounds a lot like the Stackbacks Budget.
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I like the idea of just sticking to the envelopes and using cash. I just don’t like using plastic to pay for anything (except gas with a debit card) because it emotionally detaches you from the transaction. There’s also the issue of gift cards expiring before you can use up the balance.
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Oh yes.. make sure those land’s end cards that are a couple years old are worth something..!! And some states do require gift card balances to be escheated, ie, listed as abandoned or unclaimed property and the money remited to the state treasurer. It varies from state to state how long a period of non -use they consider a gift card to be abandoned/unclaimed. I myself have been auto depositing X amount of money every week into an account.. it’s a large amountn (for me) and i plan on not touching it unless my bank account is just about to go into the red.. i just really need to sit down and open a better account, figure out my plan for debt reduction, etc. all while still trying to have a life..! We’ll see..!!
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@leanne
Are you sure about the interest rates? When you get up high (I had over $10,000 in an ING account at one point), and you cross down over milestones (when I went below $10k), my interest rate definitely went down.
You’ll notice that after I deposited a large sum of my my interest rate jumped, and as I withdrew it (for tuition -_-), my interest rate fell. Maybe it was just coincidence, but I’d want to see ING’s official policy on interest rates before I believed it.
Feb 1, 2008 Interest Rate Change to 3.348% (3.40% APY)
Jan 31, 2008 Monthly Interest Paid 0.41 125.72
Jan 23, 2008 Interest Rate Change to 3.590% (3.65% APY)
Dec 31, 2007 Monthly Interest Paid 17.46 125.31
Dec 17, 2007 Internet Withdrawal BANK OF AMERICA, N.A. checking account XXXXXXXXXXXX (8,800.00) 107.85
Dec 13, 2007 Interest Rate Change to 4.025% (4.10% APY)
Dec 12, 2007 External Electronic Withdrawal from PAYPAL INST XFER (65.07) 8,907.85
Dec 12, 2007 External Electronic Withdrawal from PAYPAL INST XFER (62.17) 8,972.92
Dec 11, 2007 Internet Withdrawal BANK OF AMERICA, N.A. checking account XXXXXXXXXXXX (1,000.00) 9,035.09
Nov 30, 2007 Monthly Interest Paid 35.09 10,035.09
Nov 19, 2007 Internet Withdrawal BANK OF AMERICA, N.A. checking account XXXXXXXXXXXX (598.95) 10,000.00
Nov 1, 2007 Interest Rate Change to 4.121% (4.20% APY)
Oct 31, 2007 Monthly Interest Paid 37.83 10,598.95
Sep 30, 2007 Monthly Interest Paid 13.50 10,561.05
Sep 19, 2007 Interest Rate Change to 4.218% (4.30% APY)
Sep 19, 2007 Internet Deposit BANK OF AMERICA, N.A. checking account XXXXXXXXXXXX 10,000.00 10,547.55
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Sounds like a fancier version of envelopes.
My favorite is the ING subaccount. Easy to use and you don’t have to worry that a store won’t accept it or worry about suddenly not wanting to use it at that store anymore.
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I have to agree with Diatryma.
It may be a little risky if you’re talking about buying gift cards you won’t use for months. But for keeping a monthly budget on such things as groceries or gas, this seems like it could be a pretty effective trick. Especially for people like me who tend to go to the same grocery store and gas station (just the ones that I live nearest to) all the time and don’t have to worry about having options as to where to spend it.
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I think your lands end idea is different than buying yourself gift cards. For your lands end cards, your friends and family are setting money aside for you, and they have an interest in you spending their gift money on what they intended you to buy. I don’t think they would want to give you cash and have you spend it on stuff that’s bad for you, like drugs or something; extreme case, but it makes my point. You are sacrificing some opportunity so they can have that assurance.
In the buying yourself gift cards so you can save plan, you are basically putting the item on layaway, without the option for a return. This is a horrible idea. If you can’t put $20 a month in a jar labeled “fancy toy I saw at xyz store” then you are in a lot of trouble. This kind of tactic falls into the same bucket as pay day loans. It sounds like it might help you out, but there are much better alternatives. To be an adult, with your own budget, you need to forgo these types of tools, and start taking responsibility for your life.
If nothing else, when it hits the fan, a bunch of best buy gift certificates aren’t going to pay the rent.
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I use the Quicken savings goals for this all the time. I have all my budget accounts set up as a savings goal. My actual savings account always has a $0 balance with all the money being split into their respective ‘envelopes’. I save for large purchases this way as well. Meanwhile, the money is still in the bank, earning interest.
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I’m not a huge fan of the giftcard idea, but at our school we can buy cards from many different businesses (grocery/gas/clothing etc) with them kicking back a percentage of the gift card going to the school. With the budget cuts going on-I find it’s an easy way to support my school while buying gift cards for predetermined expenses.
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In IL it is state law that Stores accept gift cards at full value no matter how long the consumer has held them and they can not expire. There were a couple of other states talking about passing the same type of law. It still doesn’t help in cases like Sharper Image.
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I think it can be a way to TEACH somebody about allocating money. But I prefer to put that cash in a high yield savings account. It’s safe, and your money will grow as well.
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I have been using the “reverse credit” thing for over a year now. I got the idea from a post here on GRS. I have an ING account, with a quantity of money in it. I use a spreadsheet in OpenOffice to divide the money into sub-accounts, 25 of them at the moment. Each line is a goal I am working towards or a buffer for known pending expenses.
This keeps all my money in one place for any interest benefit I may get, and I am free to move money around in “accounts” as much as I like without fear of running afoul of some or another pesky federal regulation. This also makes it easy to use formulas to track amounts remaining to reach goals where there is a specific target.
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I love your blog. Very well-written and organized. I have been reading it for a while and you (and Clark Howard on radio in ATL) definitely motivated me to learn how to become a good money manager. : ) Finally opened an account on Sharebuilder last week and bought my first personal stock purchase today (been part of an investment club for a while so this will be my 1st individual purchase). Thanks to your article (http://www.getrichslowly.org/blog/2007/06/07/how-to-start-a-roth-ira-and-where-to-do-it/) and more.
Keep up the good work!
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I think for regular items or things you’ll use in the near future this can work for some. The key is to know when you’ll be using it and what the policies on the card are.
Many cards do expire/charge maintenence fees but others don’t. A few years ago I got a card from my boss during the holidays. It’s for a store where I know I will have to add extra money so it’s been hanging out in my second wallet. Three years later the card is still at full value.
@ktoth04
The ING rates in your post are due to the fed rate cuts over the past six months. I have an account with 2K and my mom has an account wiht 20K, both have the same interest rates.
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This sounds like a blond headed woman that they write jokes about. For gosh sakes just put your money into a savings account that earns interest.
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I’m actually a little surprised at how easily everyone else can get a savings account. My old bank had no interest-gathering savings accounts, and my new one was chosen because it has an amazing rewards checking program… but in order to get the interest rate, I basically have to make it my primary account. I have a savings account there, but it doesn’t get interest. When I first decided to get a savings account, I hadn’t heard about the new bank’s awesome checking and went with a pseudointernet bank; I lost five dollars of my original savings-account-start, went through a lot of hassle, and ended up having to borrow money to pay bills because of my own poor accounting.
I also like the idea of buying a grocery store gift card at the beginning of the month. It seems like a good way to enforce a budget on someone else or give yourself an added reminder not to go over.
Come on, various commenters, you’d be annoyed if all the advice here were for people miles ahead of you in saving and frugality. This is the same, but in the other direction.
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Like Ang, I can also buy gift cards that benefit the school my child will attend in the fall. The cards are for Safeway and, since I do a healthy percentage of my shopping there anyway, it will make sense to start getting the cards. I also like the idea of loading a Starbucks card once a month, but probably wouldn’t collect a bunch of gift cards to save for a big purchase.
I once lost a gift card and I’m still pretty traumatized about that. It’s the same as losing cash and there’s no way to get it back. Yes, I still use a Starbucks card but that lives in my wallet. The other card never made it there. Someone threw it out while cleaning up wrapping paper and envelopes and it wasn’t missed until it was too late….
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