Getting to a place where you’re financially secure is up to you. Ideally, you should have an emergency fund that would sustain you over a prolonged period of unemployment. The bare minimum is three months. Six months is better, and a full year should cover you in most non-catastrophic scenarios. Then there’s your nest egg – the retirement accounts that will hopefully enable you to comfortably retire someday.
But saving is not easy. Human nature makes us want to consume, to buy, to raise our standard of living as much as we can and to surround ourselves with nice things. When things are going well, it’s difficult to imagine that things could go wrong. I do believe that saving for a rainy day, while smart and prudent, often goes against human nature.
But there ARE ways to essentially trick ourselves into saving more. Here are a few.
Get Over Your Emotional Detachment
I remember reading, a few months ago, about an interesting experiment. The premise was that young people find it difficult to save for retirement because they simply can’t imagine themselves old. But as we all know, starting to save for retirement at an early age makes a big difference, and the earlier you start, the more time compound interest will have to work its magic. But how do you get people in their twenties to care about what happens to them in their seventies? Interestingly, when young people were shown photos of themselves, photo-shopped to make them look old and sad, it encouraged them to save more.
Which makes me think that one way to save more is to find a way to imagine ourselves in all those bad scenarios that happen to people all the time – out of a job for several months, injured in a car accident and on disability, stuff like that. The Great Recession definitely helped stir people in the right direction, away from irresponsible borrowing and spending and towards saving, by showing us how quickly things can go wrong. The question: How long will the impact last?
Automate Your Savings
One of the best ways to save more is to never allow yourself to be tempted to spend, which means you should automate your savings. For most of us, if we get an extra $1000 for some reason, and we’ve been wanting, say, a big screen TV forever now, it will be a huge struggle to put those $1000 in savings instead of buying a big screen TV.
But if those $1000 were funneled straight from our paycheck to our 401(k) account, well, that’s a different thing. So automate savings as much as you can. Funnel all salary raises into savings rather than raising your standard of living. Enroll in your company’s 401(k) – this deducts automatically from your paycheck so you don’t even notice it. And set up a monthly automatic savings transfer from your checking account.
Be Smart About Credit Cards
Credit card debt is very expensive. If you can’t trust yourself with credit cards, don’t use them – use cash and debit cards instead. If you feel that you must use a credit card to build credit history, make it a priority to never carry a balance on your card. Carrying a balance is expensive and completely unnecessary. Pay off your balances religiously, and you’ll never have to pay a dime of credit card interest. Of course, this means that “putting something on your credit card” does not equal “buying something that you can’t really afford.” Rather, it means you HAVE the money in your bank account, and simply use a credit card to pay because it’s more convenient, or because you want to build your credit history.
Where You Live Matters
Some locations are much more expensive than others. If you have control over where you live, my personal advice to you, as someone who lives in the very expensive San Francisco Bay Area, is to stay away from such places and choose a more affordable location. This will translate into significant, effortless savings. (Why am I still here? My husband is in the software industry and has plenty of career opportunities in the Silicon Valley. We plan to retire elsewhere though).
Don’t Pay Unnecessary Fees
It’s not just credit card fees – there are other areas where you can be a smarter consumer and stop paying unnecessary fees. Examples: Switch to a no-fee checking account; raise deductibles on your car and homeowners/renters insurance policies to lower the annual premium; if you have a private health insurance, consider getting a high-deductible one with lower premiums.
Is saving difficult or easy for you? Are you using any of the tips mentioned here? Can you add more tips to automate saving and make it as painless as possible?