THE BEST SAVING APPROACH THIS YEAR

By in Investing, Mind and Money, Retirement, Saving | 7 comments

How to Turn $500 into $5,000

Get ready for Barbara Friedberg’s upcoming book,

How to Get Rich; Wealth Building Guide for the Financially Illiterate,” sign up above & be the 1st to know.

Have you ever read an article and wished you’d written it?  “The Mighty 10 Rule”, guest post by  Matt Alden of Dividend Monk, at Budgets are Sexy, is that article. This article lays out the reason to save.

saving tips

Spend Smart-Save Smart-Live Well

Why is Saving for the Future so Hard?

Even though we all know we should save for the future, why is it so hard? Because when you want something, you don’t want to wait.

Why is saving so hard?

  • You want it now; live for today, because tomorrow you might die. You prefer not to wait.
  • Psychological aspects deter you from saving.
  • Spending can make you happy (at least in the short term). It’s fun to buy new shiny things.
  • Saving can feel like deprivation. Initially, when you save, you don’t get anything. In fact, you lose the opportunity to spend.
  • Poor modeling teaches spending. If your mom or dad modeled a spending lifestyle, you likely picked up that habit. When mom and dad splurged at the mall, you learned that splurging at the mall is a good idea.

Switch Your Thinking About Saving

What if I told you that you didn’t need to budget and that here’s a mental trick to help you save.

Imagine, before you buy, paying ten times the amount of the purchase price for that same item. Considering a splurge on the new iPad tablet for $599? Would you pay $5,990 for the same tablet? Probably not. But clearly, the tablet doesn’t cost $5,990….. but that’s how much future income you forgo by buying the tablet today, ten times the original price.

The math is quite simple. Assume that instead of buying the iPad for $599, you invested the funds in a diversified index mutual fund and averaged an annual rate of return of 6%. After forty years, your initial $599 has grown to about $6,000. Choose to invest instead of spend and you have the opportunity for greater wealth in the future.

As Matt mentioned in the “10 Rule”, if you apply this concept to everything you run the risk of cutting spending back to miserly levels. Obviously, this is not the best use of the rule. You need to spend to live and enjoy life. Yet, realize that every time you spend, you are forgoing the opportunity to save and realize greater wealth in the future.

Balance is the Answer to How Much to Save Now

Spend today on what matters. It’s up to you to decide what’s important now, and what’s not. If you want a tablet computer, do you need the iPad? Why not buy the Samsung Galaxy for $179, instead of the iPad for $599. Invest the $420 (in a diversified index fund) you saved by not purchasing the iPad and in 40 years, you have $4,320 more in your account to spend than if you’d bought the iPad.

Think about whether a purchase now is worth giving up future wealth, worth ten times the cost of the item.

How do you motivate yourself to save? Do you have your savings automatically deducted from your paycheck?

image credit; google images_inhabitots

    7 Comments

  1. I have been a lifelong saver! My parents gave me what I needed not what I wanted. I had to save to get those things. Savings provide choices! When you don’t have savings you usually make all the wrong choices such as putting it on a credit card (financed) or buying the cheap item just to solve the problem.

    krantcents

    January 18, 2013

  2. My mom is a great saver, so I think I naturally got it from her. But being on my own in a new country with my own money got to me and I was living paycheck to paycheck until a few years ago. The main thing that pushed me back in savings is having concrete goal and envisioning my goal every time I want to spend something. Thinking along the lines of – If I want to spend $600 on an ipad, my vacation will be delayed 3 months and I won’t be able to make it this year. Sometimes, I will decide it is worth it, sometimes it is not. The 10x idea is a great one.

    Suba

    January 18, 2013

  3. @Krantc and Suba- I think parental influence in saving is extremely helpful. I’m sure it’s much more difficult to develop solid saving habits without early roll models.

    Barb

    January 19, 2013

  4. My motivation now stems from wanting financial stability, coming out of a rough mid-teens to twenties where I actually could not save because I was taking care of the whole family.

    I don’t remember my parents saving at all, they worked really hard until they were small business owners but still just made ends meet. It didn’t look like we struggled during the “good” years but I did see how hard they continued to work so it didn’t seem like we were flush for no reason. They did rarely spend money for most of my formative years, though, and refused to spend on things they said were “low quality”.

    I think I was always a saver from youth, though. When I was old enough to keep gift money, I saved it for things like the dog’s healthcare.

    By the time I had a paycheck, I was saving every penny I could. Now is the first time in my life I don’t have auto-savings deducted from my check but only because my company doesn’t offer that option. We still save regularly anyway.

    Revanche

    January 19, 2013

  5. I contemplate more frugal and efficient alternatives to all of my purchases without sacrificing in quality. (Most of the time, you simply are paying out of the tuckus for an absurd brand name anyway.)

    Luckily my parents were excellent financial role models as far as staying out of debt and keeping an excellent credit score, although I do lean toward being more of an avid saver than they are.

    Also the rule of ten is sage advice to dissuade some of that pesky impulse buying!

  6. @Revanche- That type of upbringing indelibly impresses upon you the importance of savings. My parents were also really hard workers and modeled wise financial decisions. I feel really lucky to have learned about saving from a young age.
    @Jennifer-That simple habit of considering more economical alternatives is a great practice. As I mentioned to Revanche, having good financial role models alleviates the need to undo bad habits.

    Barb

    January 20, 2013

  7. I am one who has a hard time saving. And..so is my husband. After spending time reading some financial blogs, I am very motivated to save and have come up with a plan. Now, to get my husband on board. My parents were savers, but they never taught me how, and my inlaws, big spenders. It is hard for me to put off purchases because I fear that we won’t have the money again. I am changing my way of thinking now. Great article! Mind blowing info!

    Jules@Fat Guy,Skinny Wallet

    January 21, 2013

Trackbacks/Pingbacks

  1. Don't be a Victim of Mental Accounting? | Barbara Friedberg Personal Finance - […] out of their way to save 33% on the calculator and not 4% on a leather jacket? We feel…
  2. SHOULD I BUY AN IPAD, KINDLE FIRE, OR SAMSUNG GALAXY? | Barbara Friedberg Personal Finance - […] I like the phone, and continue to decipher all the functions. The cost is reasonable, I’ve moved out of the cell…
  3. AMASS $70,000 BY CHANGING ONE LIFESTYLE HABIT | Barbara Friedberg Personal Finance - […] Is it worth planning and spending a few minutes each day to pack some snacks and a lunch, in…

Post a Reply

Your email address will not be published. Required fields are marked *