Reap the Benefits of Direct Deposit -- Without Direct Deposit

The following is a guest post from Cheap Like Me -- where economy and ecology meet:

In just about any advice you read about saving money, you'll come across a line like this: "Pay yourself first. Have a portion of your paycheck automatically deposited into a savings account …"

Great advice. Just one problem: Millions of Americans are self-employed or earn mostly cash pay (from writers to artists to waiters to other tip-oriented professions) and have no paycheck, and therefore no direct deposit.

But the automatic savings advice is doable for independent contractors and the self-employed -- with a bit of extra planning.

• Plan for taxes. If you are self-employed, you probably pay quarterly estimated income taxes. Job One is to be sure you set aside funds to pay the IRS. Figure out your estimated tax bill (a worksheet is available here). Save for this bill in a business savings account or a separate personal account. Set aside 1/12 of the bill every month, or a percentage of every check -- whatever works for you.

• Bill yourself. To pay yourself first for taxes or any savings goal, set up savings as a bill that simply must be paid. If you wouldn't let down your mortgage company, don't let yourself down, either. Add the amount to your budget. If you use Quicken or other money management software, add savings as a "scheduled transaction" -- a bill that reminds you to pay it each month, along with the phone and insurance. (I have several of these "bills" set up for tuition, my daughter's summer camp, investment savings, etc.)

• Be old-fashioned. If you deposit your checks or cash in person or by mail with a deposit slip, be your own direct deposit. Ask the teller to put a specified portion of your deposit immediately into savings, just the way Grandma used to do with her passbook savings account. You'll reap the benefit of never seeing a pre-savings figure in your checking account.

• Get to know online banking. Find a bank or credit union with free online banking. Make a note on your calendar to transfer your designated amount to savings as soon as the money comes in. On that date, go online and make the transfer - no changing your mind, no extra spending.

• Go automatic. Almost as good as direct deposit is automatic savings. With an online savings account, you can schedule an automatic transfer from your checking account to your savings account on the same day of each month. This too will help you see the transfer as another bill.

• What if you're offline? Even if you pay bills in cash and use a bank seldom or never, you can still pay yourself first by using the envelope system. Budget a savings amount and put it in a specific location. Be cautious as the cash adds up -- you're not only at risk of losing it (through theft or the urge for a sudden splurge), you're also missing out on the benefits of interest income.

• Hands off. Keep track of your savings, but make them difficult to access. If you sometimes hit bottom on your checking account, which in turn pulls from your savings to make up the difference, you can erode your savings without even noticing. An online account is a great way to keep your stash out of sight, out of mind.

With patience and commitment (you're paying this bill to help yourself, after all!) you will see your savings grow. Best of all, anyone can do it.

Do you have other ideas about how to save when you work outside the mainstream? Please chime in.

Comments

[Blaine Moore (First Time Home Owner)]

I do have direct deposit, and it goes straight into savings. Money is then taken out when needed for bills, rather than the other way around.

[Minimum Wage]

I tried paying myself first but the utility companies found that arrangement unacceptable.

[Minimum Wage]

Where I work, paychecks are released at of after 5pm. Direct deposit will never be available because that would eliminate the weekend float on which my employer depends.

[Pam]

I finally figured out how to be faithful with saving. I had to open an account at a different bank (online savings account) and have the money automatically sent to that account each month through my automated bill payment program at my credit union. Trying to build a savings account at the same credit union where my checking account is was impossible. It's just too easy to get online and do a quick money transfer from savings to checking. Now, I'm actually saving AND I'm earning a much higher interest rate than I would at my credit union. :)