How to Properly Save Your Service Discount

by Kevin on February 27, 2009

Yesterday I explained how I saved $15.99 on my TV service for the next 11 months.

Today I’m going to show you how to make your sure don’t blow that saved money on items that are not a true priority for you.

Congratulations on Your Discounted Rate

First, congrats. You stepped up to the plate. You made the tough call to customer service. You negotiated a lower rate. You deserve a cookie.

smiling cookie

(Photo by CarbonNYC)

Now, you need to keep your fast-spending habits from wasting all the money you just worked so hard to negotiate out of your service provider. If you don’t keep yourself in check you won’t see any true savings. There will be no difference in your budget and that money you just earned will disappear as if you never negotiated for it.

I’ll use my $15.99 per month over 11 months as an example.

Adjust Your Monthly Budget

So I’ve just reduced my TV rate by $15.99 for the next eleven months. In our budget TV service falls under the utility catagory. Let’s say we set aside $375 per month for all utilities every month. It’s a rough estimate and some months our electric bill is higher than expected, some months the gas bill is lower, but overall let’s say we budget $375 for utilities every month.

This is really simple math. Just subtract $15.99 from that budgeted amount. Let’s make it easy and just call it $15. Our new monthly budget for utilities is now $360. Alternatively you could keep your budget the same — $375 — and just deduct the money at the end of the month into a different category.

But you can’t stop there.

You now have two options. Save the money or pay down debt.

In 99.99% of all situations out there the money should be used to pay down debt faster. The rate of return you earn on paying off debts that charge you interest will exceed what you can earn on a savings account.

Assuming you’ve been reading this blog for some time and are now successfully out of debt, your next option is to save that new found money.

It doesn’t really matter where you save it as long as you are earning a decent return. (Hint: your local brick and mortar bank probably pays 0.5% interest or less. This is bad.) You might try ING Direct (we use and love them), HSBC, or even finding a high-yield CD through MoneyAisle. All of these are paying above 1.75% in interest (as of this writing). It may not seem like much, but that’s three times as much as the 0.5% brick and mortar rate I just quoted you.

Give the Savings a Name

I am a firm believe in giving every dollar you earn and spend a name. It forces you to tell your income where to go every month. The same applies here. Don’t let the $15 you just saved float off in the air. You will end up spending it elsewhere unless you throw a lasso on it right now and tie the lasso to an anchor.

For you this may mean opening up a new catagory in your budget called “[your utility] savings”. Each month when you do your budget, you simply add $15 to this new catagory. As it adds up you will need to decide what to do with it.

Even better — if you called several of your service providers and got discounts from all of them, you could combine all of the discounts into your new category. Wait until the end of the year and see how much money you have really saved.

Add the Money to Your Savings Snowball

I’m hoping you have extra income left over at the end of a normal month and that this new savings isn’t the start of your savings. If it is your first savings, hey, congrats.

Otherwise you should already have a savings snowball set up for your saving goals. Simply put you line up your savings goals in order of most important to least important. You figure out how much money you need to put toward each goal every month to hit the target by whatever time you need the money.

For example, if you are planning to buy a car with cash in February 2012 and need $10,000 to do so you will need about $277 per month. Every month. Until you hit your goal.

Thus every dollar you have left at the end of the month goes towards that first and most important goal until you hit $277. Dollar number 278 goes towards your second goal.

Alternatively, you could simply say “this is my most important goal” and put every dollar towards that goal until you hit it.

Now what to do with that $15 extra every month? Just add it to the snowball. Put the money toward a specific category and watch that category fill up faster than normal.

The Beauty of Saving This Money

There is a certain financial beauty to this process. You spent maybe 30 minutes on the phone and now you will save money for the next several months. You don’t have to put in any extra effort each month to save the money. It’s automatic. A true thing of beauty.

Just make sure you don’t waste your efforts by blowing the money elsewhere. You can save it. You could even lend it out on Lending Club to try to turn that $15 into something larger. Either way — you make the decision instead of your money making the decision.

{ 4 comments }

the weakonomist February 27, 2009 at 7:35 am

I’m a firm believer of naming your money as well. Aside from two retirement accounts, I have 4 bank accounts. A basic savings and checking, and two ING Direct accounts.

My basic checking gets 30% of my paycheck and is used to cover normal weekly expenses. Tmy basic savings holds the money for bills due in the coming weeks.

My ING Direct accounts hold my emergency fund and long term savings (6 months or more).

This fall I’m getting married, I plan to open two additional accounts with ING to help keep our money properly named with all the new expenses we’ll pick up.

Good post and good job on saving that money!

friend February 27, 2009 at 5:16 pm

I have heard a lot about the debt snowball, but the savings snowball was new to me. I like it! And as I am saving for a new car in 2012, your example was especially relevant. Thank you.

Abigail March 1, 2009 at 2:33 pm

This is a good point. So many of us frugalists look to save money — but then it vanishes into the ether of overall money.

For my husband and I, our “budget” (if you can call it that) is too nebulous to divvy up the way you have. (We have chronic health conditions that keep monthly expenses constantly in flux.)

Still, it’s a good reminder that there may be ways to separate hard-won savings to be sure it doesn’t get eaten up by random life expenses.

I find, much like one’s belongings, expenses will often expand to fill all available space.

Kevin March 3, 2009 at 3:40 pm

@the weakonomist: Sounds like you’ve got a good thing running there. Good luck keeping your wedding costs down!

@friend: Glad it was useful to you!

@Abigail: Exactly. Expenses are like clutter. It seems to grow on its own.

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