This article originally appeared April 28 of last year, but because I’ve had a few gloomy days to contend with the last couple weeks, I thought it might be fun to run it it again for some fresh input.  I’m already planning to start a “Sunny Day Fund” or two soon–life is short.

The other day I read an excellent article that provides some ideas for things to do with a tax refund. I enjoyed the list because it was outside of the normal, “pay off debt, start an emergency fund” standard listing of things to do with the upcoming tax rebate checks. One item in particular really caught my eye – “add it to your sunny day fund.” What a refreshing concept. I think way back in the annals of personal finance journalism someone first wrote that we should all save for a “rainy day.” It is one of those timeless axioms that we hear repeated over and over from anyone identifying themselves as a financial expert. But what about saving for sunny days, too?

Starting a “Sunny” Day Fund

If rainy day funds are for negative life experiences, it only makes sense that sunny day funds are for the good times. Maybe you save in a sunny day fund for some tickets to a place you have always wanted to visit, or for that cruise you have been promising to take your family on for years. Maybe it is something small, like saving up to take your kids to the zoo, or to take a pottery class. Whatever it is, the sunny day fund doesn’t have to be limited to just material items.

I’ve been reading The 4-Hour Workweek by Tim Ferriss and in it he advocates taking planned sabbaticals at regular intervals. A sabbatical basically involves walking away from your career for an extended period of time, usually six weeks to three months. At one time it was a growing perk, particularly in highly competitive industries with high burnout rates. The thought was that offering employees a chance to take a break made them less likely to take a permanent one.

It is hard to imagine taking an extended break from work on purpose! Most people who receive a pink slip desperately need to be re-employed because they typically have a stack of bills, and very little in savings. Imagine that same scenario if you had very few bills, and a large amount saved in a sunny day fund. No worries, right? You could live off the severance package, take an extended break to do some traveling, or whatever your heart desires, and take your time finding a new job. It is an exciting concept, but one that most people find unattainable because they continue to live paycheck to paycheck. If this is you, start thinking about ways to reduce your expenses and/or increase your income to fund a “sunny day” account.

So What’s in Our Sunny Day Fund?

I recently wrote about how much I was enjoying my new savings accounts at ING Direct. One of the best features is the ability to create “subaccounts” and give them a nickname. Our current list of subaccounts includes Emergency Fund, Christmas Shopping, Orthodontics, etc, all based on some upcoming expenses that we need to be saving towards. In addition to those accounts we also created a “Sunny Day Fund” where we are currently saving towards a vacation destination that we would like to take the kids next year. I think I’ll take Nickel’s advice, and use some of our upcoming economic stimulus payment to get a head start on the sunny day fund balance.

Ask the Readers: What kinds of things would be in your “sunny day” fund?

A good number of people expected a second stimulus check by Christmas, and many others held out hope for another stimulus check by the end of the year.  Well, with the year winding down it looks like the chances of getting another stimulus check are zilch.  And the stimulus package pitched by the incoming Obama administration looks less like a tax stimulus package and more like increased federal spending on infrastructure projects–great for our interstate system, but not so great for those looking forward to an economic stimulus check.

We The People, Without A Bailout

Since it appears we can give up on the idea the government will bail us out, even though they have bailed out numerous industries, I say it is time to bail ourselves out.  Yes, it is possible even in rough times. I frequently get asked how it is possible to save money when you are not even earning enough to cover expenses.  Well, that’s a good question.  And with rising prices and falling wages, it only gets tougher.

However, at some point we all need to give our financial picture an honest assessment.  Have we really cut out every single thing possible?  Are we really maximizing every single earning opportunity available? Chances are we are not, because to cut deeper or earn more requires making some extremely tough sacrifices.

No one likes the idea of living without cable television or cell phones, or working a 40-hour a week job and then picking up night and weekend work.  But the hard truth is that is often exactly what it is required to claw your way through a financial turnaround.  I know because we have had to do those same things.

I won’t lie to you; it was hard work and it hurt to be away from my kids while I was working two jobs and going to school at night. But we scraped and we sacrificed for a short time to get things under control so that we can enjoy the rest of our lives without financial worry.  We’re not quite there, but we are on the right path.

How To Create Your Own Stimulus Check

So rather than sitting around complaining about the government not bailing us out, or giving us yet another stimulus check, we have decided to create our own.  The last stimulus check was for $600 per individual.  That’s $50 per month, or roughly $25 per paycheck, or $12.50 per week.  Most people can easily spend $12.50 eating junk food in a week, or buying cups of coffee in the mornings on the way to work, or playing the lottery.  By simply eliminating those activities you can come up with $600 per year to add to your savings account.

The current federal minimum wage is $6.55 per hour.  To generate $50 per month one would only need to work about 10 hours (allowing for taxes). That’s 2.5 hours per week. Could you work an extra couple hours a week at your current job?  If not, could you pick up a part time job a couple nights a week, or work one full Saturday a month selling newspapers?  Sure you could, if you really wanted to.  I know people who have worked much harder, and overcome much more difficult circumstances to become successful. So instead of blaming the government for not cutting another check, or bailing you out, I encourage you to join me in a plan to rescue my own household finances.

Last week my daughter participated in a Santa’s Workshop event at school.  It is an annual event where children and their parents discuss a shopping budget, and the kids are allowed to walk through “Santa’s workshop” selecting gifts for friends and family while spending up to their established cash limit.  Parents send in money the day of the event, and teachers help kids with the math to make sure they don’t overrun their budgets.

I know a few adults who could benefit from similar restraint, especially this time of year!  With only two days until Christmas I bet there are at least a few of you out there thinking, “I don’t have this person enough stuff to open Christmas morning,” or “I need to buy my Mom another present to match the number I bought Dad.” Believe me, my wife and I are having the same discussions.  The problem is we have already spent our Christmas budget for this year, so we are officially finished shopping.  No last minute trips to Walmart to charge up a few “guilt” gifts this year.

Christmas shopping was a much more pleasant experience this year with cash.  After last Christmas my wife and I vowed to save all year long and spend cash at Christmas.  We managed to pull it off by setting up a $25 transfer to our ING Direct Christmas Fund each paycheck.  We also tossed in some “found” money including a small tax refund and wound up with nearly $600 for Christmas shopping and our annual giving tradition.

If you are already suffering from the worry over Christmas debt I highly recommend setting up your own high yield savings account at ING Direct and stashing a little away each paycheck towards next year.  It makes the entire experience more joyful not to have credit card bills rolling in right after ringing in the New Year.

Here’s what our automatic savings plan with ING Direct looks like:

Screen capture from our “Christmas Fund” at ING Direct

Notice that our account balance is already back up to $79.25 after contributions made since our November withdrawal.  As an added bonus, we also earned a little over $15 in interest last year–enough to add a CD or book as a stocking stuffer.  When the time comes next Christmas we’ll simply transfer the balance of our Christmas Fund back to our checking account, subtract a little for giving, and enjoy a cash-only shopping trip with the rest.

There is plenty of career advice floating around the web offering tips for how to get a raise.  Ideas range from proving cost savings to your boss thanks to your efforts, or cross training in a particular specialization that makes you stand out from coworkers.  But what happens after you receive the raise?  If you are like most people the slight bump in your paycheck will be frittered away thanks to an equal bump in your lifestyle.  With 2009 right around the corner, hopefully at least a couple of you are expecting a raise at work.  Here are a few ways to make that raise really effective.

Put a freeze on your lifestyle, but not completely.  I like the idea of holding expenses after getting a raise and pocketing the entire amount into a savings account at ING Direct.  However, that isn’t very realistic.  Besides, you likely earned that raise through hard work, and should enjoy at least a portion of it.  I recommend increasing your savings contributions to various savings vehicles (see below) by about half of the amount of your new raise.  With the remaining half, go ahead and sign up for that Netflix account, or gym membership, or buy that new golf putter you’ve been eying.  Success with personal finances is about finding balance.

Where to save half of the new raise.  The first place to start is your 401(k) plan at work.  Chances are you are contributing a percentage of your income, so this boost in annual salary will automatically boost your 401(k) contributions.  Still, if you aren’t contributing through a match, I consider boosting another percentage point or two using proceeds from your new raise to obtain the match.

If you are already contributing enough to receive a match in your 401(k), consider adding the remaining 50% of your raise amount to a Roth IRA.  The earnings here grow tax-free, and you can withdraw your contributions any time without penalty.  If you have already maxed out IRA contributions for the current tax year then simply dump half that raise in your taxable savings account, such as a high yield online savings account or brokerage account.  The idea is to get the money out of your primary checking account, where it will just be frittered away in DVDs and extra stops at Starbucks (at least that’s where mine would probably go!).

Should I accept a raise, or a bonus? Some companies are offering bonuses in lieu of raises this year to lessen the increased salary budget for next year.  If given the option, take a raise over a bonus, even though the lump sum from a bonus looks appealing.  Raises are permanent (well, as permanent as anything in the job market can be these days).  Things like matching retirement funds, life insurance proceeds, etc. are based on your annual salary, and with some creative accounting companies are often able to avoid these increased expenses by offering year end bonuses instead of increasing your salary with a raise.

It is nearing that time of year when we sit down to plan out next year’s resolutions. Two of the most popular New Year’s Resolutions are to lose weight and to save money. Why wait? You can start a savings plan today in just a few easy steps.

• Identify your savings goals. Have you ever heard that expression, “If you aim at nothing you’ll hit it every time?” I know it is a bit cliche, but when it comes to savings plans, it’s true. Those who find the most success saving money do so because they are committed to a plan–they have a goal in mind. It could be a down payment on a home, an emergency fund, a new (used) car, a sunny day fund, or even as far out as retirement. Most plans are a combination of both short and long-term plans.

• Consider an online savings account. I have never been a saver. I like to save money, and I whole-heartedly agree with the importance of saving money, but every time I begin to amass some savings something happens that wipes me out. That was until I discovered ING Direct. I opened an Orange Savings account with them and began moving just $25 a paycheck (every two weeks) into an account. I’ve since opened four more “sub-accounts” there with specific savings goals and put a little in each account out of my paychecks. The money is still accessible, but it is far enough away that it is “out of sight, out of mind.” Check out my reviews of the other best online banks.

• Sign up for direct deposit. I mentioned that I automated the transfer of money from my checking account to my online savings account. To take that a step further; visit your payroll office and ask if you can split your deposit into two separate accounts. Most employers allow you to identify a percentage of your check to go into a primary checking account, and the remaining percentage to go into a second checking or savings account.

• Start small, and slowly increase the amount you save. Whether you decide to use direct deposit, automated transfers, or manually write out a check each month, start with a small amount to get used to the idea. Elect to have 1% of your pay diverted to savings, or move $25 a paycheck to your online savings account. Trust me, you are not likely to miss these small amounts, and if you are like me, you probably used to spend this on eating out each paycheck cycle. Now I just brown bag lunch and pocket the savings.

Advanced Savings Strategies

Once you are comfortable with your established system of saving money you can graduate to more advanced concepts.

• Pocket your store savings. It goes without saying that to be in position to save money, you must first reduce your expenditures. One way to flip the switch is to pass on something you would normally buy in the store and pocket those savings immediately. For instance, the other day I was looking at video games and saw a new one that looked like fun. It was $49.99. The old me would have tossed the game in the shopping cart and moved on without much thought. The new me put the game back on the shelf, made a mental note of how much it cost, and went home and scheduled a $50 transfer from my checking account to my savings account.

• Keep windfalls as far away from your checking account as possible. If you are lucky enough to receive small windfalls, such as birthday money, tax refunds, money from the sale of items on eBay, etc, be sure to put that money directly in your savings account. If it finds its way into your checking account it will likely be frittered away.

• Save one dollar bills. Most dedicated savers have a coin jar at home where they dump change. Consider adding a dollar-bill box where you save all one dollar bills (with the exception of keeping a few around for tipping purposes). I heard of this idea on a radio show several years ago. The show’s host saved all one dollar bills he came across for years and presented them to his daughter on her 16th birthday. Up until that point she and the host’s wife had made fun of him unmercifully for his weird savings habit. After opening the box with sixteen hundred one dollar bills they no longer made fun of him.

Hopefully, I have given you some ideas for jump starting your savings plan, but you are the one that has to do the heavy lifting. Saving money is a function of spending less than you earn, and storing the difference. It does not matter how much, or how little, you earn. If you find yourself unable to save money because of low earnings, consider finding a side hustle, or selling some items to supplement your savings plan. The bottom line is to simply get started saving something, today!

I do my best to avoid complicated mathematical formulas (like the one featured above).  In my experience, mathematicians do a great job of taking a relatively simple process and making it overly complex by applying a series of inexplicable formulas.  I guess that’s why I was happy to run across an interesting concept the other day called “the multiply-by-25 rule.”

The idea is that you can estimate how much is needed in savings to generate enough income to pay for an item.  The only factors you need to know are how much something costs you now, and at what interest rate your money will grow.  Of course, determining both in this period of a inflation and fluctuating interest rates is tough, but you can get a general idea of how the math works by looking at a real-life example.

Photo courtesy of Behdad Esfanbod

A Working Example

We are fans of Netflix because it offers a relatively frugal entertainment option for family movie nights.  It’s cheaper than going to the theater, and cheaper than an expanded cable package.  At roughly $9 a month, our Netflix membership sets us back $108 per year.  To continue paying for Netflix out of passive income earning 4% per year, I would need a $2,700 ($108×25) savings balance.  Since most of my savings are now earning closer to 3% I would need to multiply my costs by a factor of 33.33% (100/interest rate).  This increases the amount needed to pay for Netflix after reaching financial independence by $900 to $3,600.  Maybe I should just cancel Netflix!

A Bigger Example

I have heard stories of people paying off their homes, cars and all other debts and living quite comfortable on a couple thousand dollars a month, or less.  Assuming our goal is the high end of that estimate, how much of a savings balance would be required to spin off $24,000 a year in income?

If earning:
3% interest, you would need $800,000
4% interest, you would need $600,000
5% interest, you would need $480,000

And you thought you needed to be a millionaire to retire early! This exercise does fail to account for inflation, both in terms of cheapening dollars and the costs of goods and services over time.  I doubt Netflix, or a similar company, will continue to offer one-at-a-time unlimited rentals in the year 2030 for $9.  However, running these numbers does emphasize the importance of minimizing the number of expenses you commit to early on.

Our Netflix membership alone puts us $3,600 further away from financial independence.  Our cable bill, although relatively small at $12/month, puts us $4,800 away from retiring early.  When you start to convert monthly expenditures to the amount of money required to cover their upkeep it really helps you prioritize what is important in your budget.

Homework:  Apply this formula to some recurring expense in your current budget and report the results in the comments below.  Does this required savings amount change the way you feel about continuing to pay for the item?

Ever heard that old saying, “pay yourself first?” Who hasn’t?  It is another one of those financial axioms that is much easier said than done.  When we first get paid the last thing most of us think of is saving money.  After all, there are so many other pressing needs.  Car payments, mortgages, credit card bills, and the biweekly celebration at Outback Steakhouse are all vying for our dollars.  But what if we could get just as fired up about saving money as we do spending it?  Even better, what if you could make savings a priority both at the beginning of the month, and the end?

Pay Yourself First

Under the “Pay Yourself First” plan you create some easy ways to divert money from your primary spending account to various forms of savings.  When savings are taken right off the top of your paycheck you’ll be less likely to miss the money, and less likely to spend it if it hits your checking account.  Not everything can be automated these days, but fortunately most banks and brokerages allow automated transfers with a customizable schedule that meets your needs.  Here are a few examples of ways we are paying ourselves first:

• 401(k) plan contributions are deducted right off the top of your paycheck.  Currently, these contributions are pre-tax, which means in addition to the benefit of saving money for retirement you get the added benefit of reducing your taxable income for the current tax year.

• Automatic transfers to your high-yield online savings account.  We have a variety of subaccounts at ING Direct where we funnel amounts ranging from $25 to $100 per pay period.  The transfers are scheduled to occur every two weeks, and coincide with my paycheck being direct deposited in my primary checking account (be sure to leave a little cushion to cover these transfers should your paycheck be held up for some reason). Here are a few other of the best online banks to choose from.

• Biweekly contributions to a Roth IRA.  We take dollar-cost averaging to the extreme, and instead of contributing only once a month, we divide our yearly contributions by 26 biweekly periods and contribute every two weeks.  Once we hit debt freedom we would like to max out our contributions, but for now we are content with making minimal investments just to kick-start retirement savings (and take advantage of the bargains in today’s market).

• Biweekly contributions to college savings plans for our kids.  Similar to how we’ve scheduled contributions to our Roth IRA, we make biweekly deposits in our kids 529 college savings plans.  It is all automated, so once things are up and running it requires very little maintenance.

Pay Yourself Last

During the month we make a game out of trying to best our budgets for the various spending categories we have setup.  Things like food and entertainment are areas where we are typically able to come in under budget, and when we do we sweep that money into our emergency fund to continue building it towards our goal of 6-12 months of expenses.  In the past, we have also used this extra money to boost our debt snowball payment.  The idea is to reset that checking account before the next month starts, and to account for any remaining money by putting it to work for us, rather than frittering it away in miscellaneous spending.

In what ways are you paying yourself first?