Boil That Frog: An Incremental Approach to Saving Money

Photo: aaronbeekay

It's entirely possible you've never heard the little scientific experiment where if you drop a frog into a pot of boiling water it jumps out, but if you put it in room temperature water and slowly turn it up, the frog boils alive. It's possible, but damned unlikely that my little summary is the first time you've ever heard that.

That's because it gets used something like 4 billion times a year as an analogy. And, today, I'm going to contribute to the problem. The thing is that it is just a good analogy. If I could come up with one that makes the point better I would. Alas, I am a flawed human being, who is falling short of his creative potential.

Enough about my character flaws and on to the point. I recently decided to see if I could financially boil myself alive in savings.

See, looking at our tax returns this year, I was appalled at how much money we made last year and how little we have to show for it. I know for a fact that I could cut back in some specific areas: Netflix, DirecTV, Emusic, etc. all add up to a not insignificant amount of money each month.

However, rather than just cutting the obvious places, I'm running a bit of an experiment similar to the frog setup. It's all based off of the very real fact that nearly everyone spends whatever money is available in their accounts (and if you're American, there's a pretty good chance you spend a few extra bucks as well). That's how you can triple your income over 10 years but not "feel" any richer.

My approach came from the stuff I started doing to save for our 2008 Ireland trip. By setting up really simple and small weekly transfers, there's now $1,100 in that account. That same principle of automated, "hidden" payments is exactly how the IRS manages to get as much of our money as they do.

If you go back and look at the creation of the federal income tax historically, they had real difficulty collecting for the first while. It wasn't until the economist Milton Friedman worked with the IRS to set up the employer-based withholding system (a decision he's later said he regrets) that pulls the taxes out before you even get dollar one. When combined with the Medicare, Social Security and state income taxes that have all benefited from the same setup, the government is able to grab one dollar of every 3 we make.

That's pretty effective given that even during the years when people in the United States used to save, they only averaged 8% savings. Basically, whenever you can make the savings automatic and make it happen before the money drops into your checking account, you will be able to save more.

The "Boil That Frog" approach to saving money takes that a step further. Everybody has experienced getting a raise and discovering that you somehow just ended up spending the extra and you aren't sure how. It's a well established pattern that people will raise their spending level (demand) to their income level (supply). So, what I'm looking to do is very slowly throttle down the supply.

If I just decided to start saving half of my income, it would hurt. Just like the frog, I'd jump out of the pot. However, if I start out saving $25 a week and raise it to $27, then $30, then $35, etc. I'm probably going to just gradually adjust other spending accordingly because there just isn't as much money lying around in the checking accounts.

So, here's what I'm doing. Any paychecks or other post-tax money will be dumped into a designated account. At a different bank than my usual bank (so the balances aren't right there when I log on to do regular bill paying, etc), but one that I can easily transfer money within 24 hours. I'm using E*TRADE for several reasons beyond that:

• 5%+ interest on savings accounts.
• Robust transfer scheduling. I can schedule really frequent, small transfers not just between E*TRADE accounts, but any of my bank accounts.
• Decent bill paying capability. Paying down credit cards *is* saving and making extra weekly payments can knock balances down quickly.
• They have their ATM's in Target stores so I can easily make extra deposits without wondering if it will be handled properly. (Hey, I'm paranoid about ATM deposits for some reason)

At any rate, I'm starting with a baseline fixed income or "allowance" that matches what I was making as a salaried employee. Any deposits beyond that salary will sit there to smooth out vacation time, sick days, time without work and clients who don't pay on time. Twice a month, I'll have a scheduled transfer to my regular checking accounts at the credit union.

My normal savings transfers from the credit union accounts will continue, with this being an extra way to ratchet things up a bit. Every time I get paid, I'm going to reduce the transfer to my regular checking account and siphon the difference to an E*TRADE savings account.

I'm going to start with a $100 reduction and make the increases from there. I'm going to do 5% increases in the savings every month. I use 5% because it's a number that's a number that's proven useful when talking about price increases.

• It's about what sales tax amounts to in most places.
• When it's tacked on to the price of something, while we may get irritated, it's not enough for us to cancel the purchase.
• It's small enough to slip by, but big enough to add up over time.

So, this month, it will be $100, next month $105, the next $110, etc. What I'm curious to see is just how "hot" I can get things before I feel like I need to jump out of the pot.