For me, the hardest part about learning to save was changing my relationship with money. I understood intellectually that I needed to spend less than I earned, and I could see the debt accumulating as I spent, but money management isn't just about knowing the math. It's mostly about knowing yourself. It's about building self-discipline, and about learning to see money in new ways.
While browsing at Passion Saving the other day, I discovered an article featuring ten unconventional money-saving tips. Each of these offers a new way to see money. Here are author Rob Bennett's ten tips along with my comments. (Note that I've re-ordered these from the original article.)
- Pursue short-term saving goals. While saving for retirement may be the ultimate goal, it's not always a motivational one. Break long-term goals into chunks. Find saving goals that can be completed in just a few years.
- Don't save in pursuit of vague and general goals — save in pursuit of a particular change to enhance your life. Make savings matter by setting money aside for lots of specific little things throughout the course of your lifetime. You're not just saving to be able to do what you want at the end of your life, but to also to be able to do the things you want today.
- Pursue intensely personal goals. “The trick to becoming an effective saver is identifying [with something, a] saving goal that provides you with the motivation needed to get the job done,” Bennett writes. “To save well, you need to direct your money management energies to the pursuit of a goal that hits your emotional hot buttons.”
- Stop thinking of saving as something that only misers do well. “There's nothing small or cheap or sick about effective saving,” writes Bennett. “Not if you're doing it right. Save for the right sorts of reasons — life-enhancing reasons — and you will no longer think of saving as miserly.”
- Don't pay yourself first. Instead, pay yourself last. This recommendation sets a sacred personal-finance mantra on its ear. Bennett says that thinking of savings as something that must be endured makes it seem like eating your least-favorite vegetable. “Pay yourself first” might be a good way to start saving, but to really make it effective, you must learn to see saving as fun. You need to pay yourself last — and often. Reduce your spending so there's as much as possible left to save.
- Translate dollars spent into the hours you worked to earn those dollars. This is straight from Your Money or Your Life. Time literally is money. Each dollar in your paycheck represents some amount of time it took for you to earn it. (And it's not just your hourly wage.) Figure out how much time a dollar is actually worth to you, and you can begin to see your expenses in a whole new light. Is that new digital camera really worth a week at the office?
- Include income tax when determining how much it costs to buy things. Benjamin Franklin was wrong when he said “a penny saved is a penny earned”. When you consider taxes, a penny saved is usually closer to a penny-and-a-half earned. You have to earn $300 pre-tax to afford the $200 post-tax you need for an iPod. Mentally accounting for the income tax on the money you earn can help prevent you from spending it!
- Use the multiply-by-25 rule to determine how much it takes to finance “for life” each of your spending categories. This one's a little esoteric. We haven't talked much about early retirement and “safe withdrawal rates” yet at Get Rich Slowly, but roughly it's assumed that a person can pull about 4% from saved assets each year without depleting them. For every $1000 you invest, you can theoretically withdraw $40 per year (which is 4%, or 1/25th) without touching your starting capital. So, if you spend $40/year on a newspaper subscription, $1000 in savings pays for that subscription for the rest of your life.
- Remember that you only have a limited amount of income available for saving; when you spend this money, you're depriving yourself of future freedom. Don't think of the money you spend as a percentage of your total income. Think of it instead as a percentage of your potential savings. If you buy one videogame a month, it might only be 2% of your take-home pay, but it could very well represent 25% of your potential savings.
- Focus on getting over the $100,000 hump. “Saving your first $100,000 is hard,” Bennett writes. “But the second $100,000 comes easier.” When you focus on having to save a million dollars (or some other huge number) for retirement, it can seem daunting. Focus instead on the first $100,000, and the skills you learn will help you save the rest. (I have to say that even $100,000 seems huge to me — I'll focus on smaller “humps” for now.)
I often say that money is more about mind than it is about math. These tips are excellent examples. While some of them do include some arithmetic, they all address psychology. For more on these money-saving tips (and for other interesting articles), visit the Passion Saving web site.