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?
{ read the comments below or add one }
You always save when you save before you spend.
You seldom save when you spend before you save.
@Justin – root means sex in Australia…just saying
I posted a piece on this a few days ago. “Why Save?” My strategy is to create bold and exciting reasons to save. This makes saving easier at all levels. Saving without a purpose is unsustainable, and futile.
Automating your savings is the best way I can think of. If you dont miss it, you wont spend it. Great idea and cant be said enough times.
This is a great article. It is so true–saving is one of those terribly mundane things that we never want to do but always know that we should. It’s so much more enjoyable to spend and consume than to save. I’ve studied this for some time with some close colleagues and am fascinated about the topic.
We’ve found that success with money management is more about psychology than accounting. What we need are tools that help connect you with where you want to go and who you want to be on-the-go, at the point of sale/temptation to fend off over-doing consumerism.
The problem is that tools available today are accounting base and very few people can do accounting enough to stick with it. We’re trying to change this game so saving is very rewarding.
Again–great topic. I enjoyed your observations.
I love how you said “Spending (your savings.)”. I’d think that if you thought of spending as not just getting that new toy but actually taking away from the savings you’ve worked hard for, you will spend much less. (Actually, I would think that you would spend MUCH, MUCH less).
I think it’s easier when you start thinking about tradeoffs. Saving isn’t as much fun as spending because there isn’t any instant gratification when it comes to saving. Spending (your savings.) is where the fun is, so make saving fun by thinking of tradeoffs. I am saving towards a happy retirement, a vacation, a new gizmo, whatever. Once you start framing it as a tradeoff, I think saving because much easier.
Right now we are aggressively paying down debt, which will become savings when the debt is gone. Also, just this week I redirected our social security tax savings for 2011 to our IRAs. That’s pretty painless, since we’re used to having them come out anyway.
The thing I would like to mention about insurance cost is that it’s important to remember that your premium will (in many cases) go up if you report a claim and they have to pay. When I had my only accident, my car insurance went up significantly – this confused me because it wasn’t my fault, but they said that I was still considered higher risk. The problem was that they only paid $1500 (which was enough to cover the damage), but I ended up paying probably 3-4 times that in a higher premium over the 3 years until it cleared from my record. So unless you have accidents every month, it’s cheaper in the long run to pay less per month, pay to fix small-medium damage, and use insurance mostly for liability coverage and major accidents.
There are actually many cases where a high deductible medical insurance plans is better for wallet. My wife’s company has an awesome health plan but when she quit, cobra wanted us to pay $1,500 a month for the same coverage.
Instead, we went ahead and signed up for a $150 a month individual plan with a $1,000 deductible. They were both PPO, so we see the same doctors and everything else is practically the same. Even if the $1,500 plan had 100% coverage, it would seem that the $150 a month plan is more cost effective since we would make up the difference in deductible in about 2 weeks.
Erin,
I think both you and Vered make a good point about insurance deductibles. Insurance is the transfer of risk, the more risk you transfer to the insurance company the more you pay. How much you should transfer depends on several things including both your tolerance for risk and your personal financial situation at the time.
You should keep your deductible at the highest amount you could comfortably cover. Some people with $50k in an emergency fund would be totally stressed out if they had to pay a $5K deductible, so they pay higher premium to get a $1K deductible. Another family with an $8K deductible is happy to lower their premium and pay the first $5k in the event of a loss.
Personal finance is personal; your decisions need to fit your life.
The ones hardest hit by the recession will likely be forever changed. Any once middle class child that has been left temporarily homeless by their parents foreclosure will have a different view of risk for the rest of their lives.
I disagree with the pointer about moving to a place with a cheap cost-of-living. Your environment directs so much of your life: the people you meet, the classes and workshops and events you attend, the ideas you’re exposed to. You should live in the place that you most enjoy and that gives you the most opportunity for personal growth and satisfaction. Period. Sure, you can save money by living somewhere boring. But why bother?
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.
I absolutely cannot agree with this as a way to save money. If you raise your deductibles too much and something happens, there goes your savings anyway. Better to pay a little more each month and be able to keep your smaller savings for the things insurance won’t cover when you have an accident or medical need.
Yeah it is all about controlling expenses one way or the other to have some savings which are difficult.