If you don’t save money, I bet you will after reading this!
Saving money is the number one indicator of what a person’s financial picture looks like. If you don’t save, you are one of the 76% of Americans who struggle with the simple concept of consistency. Saving money isn’t about lack of income, demographics, discipline, or stability. Those who save money, do it because they have goals and the principles they live by. We learn most of our money management skills from our parents, friends, and family members. I think that fact is one of the major reasons Americans struggle to save money.
So what do I mean when I say to save money? This is where consumerism battles with the nest egg theory. In this article, when I use the term save or savings I am talking about intentionally allocating funds from EVERY paycheck to financial goals other than the 2-4% you put in retirement 401ks. I don’t care about your nest egg or retirement savings plan. This post is to help you live a better life in the short-term as you learn the secret to building wealth.
Why don’t people save? The answer is simple, we live in a society where we are able to eat, drive, use, play, and take things that we can enjoy now, and pay for later. This instant gratification, makes it seem insane to save for an item when credit is readily available. So instead of learning to save and having your money grow, we trade the rewarding lesson of savings in exchange for credit card statements and interest. Have u ever heard or “hyperbolic discounting”? It’s a theory that proves instant gratification always wins the battle even if when the choice is the less favorable. If I offered you the following boxes which would you choose?
Box #1: $1000 now
Box#2: $2000 one year from today.
Neuroscience proves that our brains aren’t equipped to make us natural savers. Everyone chooses box #1, solve my problem now, even if I could double my money a year from now. To add another disappointing angel, we love to stick with defaults and never opt out of anything! Most Americans only have retirement savings because those accounts are “out of sight, out of mind”.
Automatic investing is the sure way to take the “lack of discipline” and “Failure to develop a savings habit” issues that prevent many from saving a single dime. Grab a pen and paper and write down the answer to the following questions to see just how bad we are at saving our income when we take a look at our actions or inaction over a compounded span of time.
1. How long have you been working?
2. How much do you have in savings (not 401ks or IRA’s)?
3. How good of a job have you done in that time span? If you aren’t sure multiple the number of years by 26 and divide your total savings by that number. The result will be the average savings per paycheck for your working life.
Total Savings/(Years of working life * 26)
If you haven’t saved much, that calculation can really put things in perspective. If you worked 8 years to accumulate $800, that can really bring some emotions to the table. So what can you do about it?
Now I know you came here to find an answer to the problem, not to hear me spew about how bad we are at saving. The first step to solving a problem is to admit we have one. The second step is to seek solutions. Here are the solutions to your problem, you will create savings no matter your income! Yup, if you make minimum wage or earn six figures these steps will change the outlook of your future savings.
1. Create your expense ceiling! In order to pay yourself first multiply each paycheck by .90, this is what u need to live on, in order to win with money. Cash flow isn’t about income it is about ratios. Now take that remaining cash and round down (or up) to the nearest $50. This is the amount that you will set as an automatic saving’s transfer.
For example, John earns $875 per paycheck, following the rule above, he needs to live on $787. Now we round down to the nearest $50, which brings us to his expense ceiling which is $750. His surplus will be $125 each payday and he will create an automatic transfer rounded down to the nearest hundred. In this case, John will set up a $100 automatic transfer to his savings account each payday.
2. Commit to a savings principle. Create a compounding disciplines that will matter little now, but will be life changing later. I currently use Acorns to round-up all my card swipes to the nearest dollar and deposit that change into an investment account on the app. Additionally, I save all physical change and deposit it into that same account every 6 months. I’ve been doing this for 1 year and I have $800 in my investment account from spare change!
3. Budget your money! you should budget your money, even the money that is left over after you pay all your bills. If you fail to tell your money where to go, it will disappear. You must be intentional with your money. The proper way to budget is monthly before the month begins. You should already have next month’s budget completed and everything you plan to spend money on should be written into that budget.
4. Save $1000 as fast as you can! You need to complete this goal and guard it with your all. This can be $500-$2000 based on your savings ability or potential emergency costs.
5. Visualize your savings goals. I use the app Qapital to save $1 per day and $5 per week. This ranges from $50-$56 per month and seems small in the short-term but guarantees the accumulation of wealth long-term. It is a beautiful app that allows you to set pictures and dollar amounts to savings goals. It tallies your savings daily so you get to see your money grow towards your savings goals. Another cool feature is its ability to invent co-goal owners, so if your planning a wedding or vacation as a couple this app is pretty sweet.
It may seem like these small changes in your savings habits will take a long time to reach financial goals, but the only way to run a marathon is to take a single step. I promise if you follow the 5 steps above you will have something you may have never had… savings that increase each month!