The only way to start getting ahead financially is to
consistently spend less than you make.
From a financial point of view, everyone in the world falls into one of three categories:
Debtors are people who do not have any cash on hand or in the bank AND owe money to other people or institutions.
These folks are in a worse situation than people who simply don’t have any money, because even when some money does come in, it is not really “theirs” until their debts have been paid off.
Floaters are people who don’t owe any money, but who spend whatever money comes in just about as fast as they get it.
“Floating” is somewhat better than being in debt, but it’s still not a comfortable place to be. If floaters don’t change their attitude and their approach to money, they will always be “living from hand to mouth.” They will not be able to do anything or get anywhere in life that takes more money than is needed for simple day-to-day existence.
Savers are people who don’t spend all their money, but instead put some of it in a bank or other kind of account for use at a later time.
People who put their savings in an interest-bearing account also get a certain amount of “free” money they didn’t have to work for. This extra money came to them because they were able to save and deposit some of their money when they made it, instead of spending it right away.
The main purpose of saving is to accumulate enough money to do some big and important things that require money. If you have any big things like this in your life plan, the only way this can happen is for you to patiently save enough to afford them.
Exercise: Which of the above three categories best describes your own financial situation at the moment? How close or far away are you from moving into the next higher category? How strongly would you like to do so?
Everyone Can Save
At this point, you are probably thinking, “Yeah, sure! I’m making minimum wage and you want me to save money? Let’s get real!”
The answer to this is, “We’re being very real.” For example, suppose you’re a pack-a-day smoker. Unless you bum all your cigarettes from somebody else, you’re probably spending $30 or more a week on cigarettes. If you were to put this cigarette money into a savings account instead, this would give you over $1,500 a year, plus interest. This would certainly be a big start on a successful savings program, or it would pay off a lot of debt if you’re currently in the debtor category.
In addition to quitting smoking, there are many other ways of saving money, even if you have very limited income. For example, you could take advantage of the free lunch and dinner programs that are offered in several locations. If you regularly ate a free lunch or dinner instead of going to a fast food restaurant, this would save you about $5 a day, or almost $2,000 a year. Combining this with not smoking would give you close to $4,000 a year in savings.
Psychological Obstacles to Saving
Depending on (a) how you were brought up with regard to money (including seeing how your parents may have handled or mishandled money) and (b) your own experiences with money so far, you may have developed some negative attitudes that make it hard for you to save money on a regular basis. These include:
- “I have so little money it’s not worth trying to save anything.”
When you really think about it, this argument does not hold water. The only sure way to “have more money” is to begin saving some of the money you do have.
If you wait to start saving money until you somehow have “more” of it (perhaps by winning the lottery, or by getting a sudden inheritance from a long-lost relative?), you will most likely never have the “more money” you are waiting for, and you will never be willing or able to start saving.
- “I work hard during the week and need to spend something simply for enjoyment. If I’m asked to save, I won’t have anything left for enjoyment and relaxation.”
It’s certainly true that some enjoyable activities have a price tag. However, this does not mean that all enjoyable activities have to cost money. In other words, you don’t always have to spend money to “enjoy yourself.” Indeed, some of the most relaxing and pleasant activities you can do (for example, hiking, reading a book, or perhaps volunteering some of your time for a worthy cause) cost absolutely nothing.
- “Other people I know have (an expensive wrist watch) (a big collection of CDs) (a fancy restaurant meal once a week), so I should, too.”
This is a variation on the “enjoyment” theme. One major problem with it is the simple question, “To whom are you going to compare yourself when you talk about what ‘other people’ have?” Unless you become the richest person in the world, there will always be other people who have (or can buy) more material goods or services than you can.
Trying to “keep up with the Joneses” by buying more things or spending more for various services (platinum-level TV programming instead of basic cable?) is a never-ending and actually impossible task. Now and for the rest of your life, there will always be some “Joneses” somewhere who have something more or better than you do. So don’t worry about the Joneses, but instead make it a habit to live and enjoy your life in a modest and cost-conscious—but very pleasant—way.
Unfortunately, the advertising industry in the U.S. goes to great lengths to convince people that they really “need” the things they are selling. For example, a belt manufacturer may produce an enormously expensive television commercial to convince the viewers that wearing their Rodeo Grande belt with its sterling silver-plated buckle is exactly what it takes to win the steer wrestling championship and gain the undying attention and admiration of the opposite sex.
But in fact, if you think past all the glitter and glamour of the television commercial, you quickly realize that many local, budget-minded stores carry a variety of belts that are quite attractive, much less expensive, and can hold your pants up just as well as the famous “Rodeo Grande.”
The money you save by resisting the lure of the silver belt buckle (or any other material items you don’t get any real benefit from) will go a long way toward building up the savings nest egg you’ll need for much more important money-using purposes later.
Exercise: Can you think of a particular item you paid a good amount of money for and sometime later realized it wasn’t really “worth it” in terms of the usefulness or service it gave you? Do you think advertising had anything to do with your buying it?
An Easy Way to Save: Direct Deposit through Your Employer
Perhaps the greatest single aid to getting and keeping the saving habit is the so-called “direct deposit” system many employers offer. In this system, the employer does not give you a paper pay check, but instead deposits your earnings in a bank account in your name.
You can often arrange for a certain amount (or percentage) of your earnings to go directly into a separate savings account and the rest into a checking account.
Because the savings amount has already been taken out and put into its own separate account, you could spend every penny of the money in the checking account (which we don’t recommend!) and you would still be saving regularly according to your pre-arranged plan. Provided you don’t take any money out of the savings account, your nest-egg will grow steadily and automatically.
If you receive regular financial assistance from a federal, state, or local agency, you may be able to arrange with that agency to deposit a certain amount of the total amount directly to your savings account and the remainder to the checking account.
Your Own Direct Deposit System
If your employer or other agency doesn’t offer direct deposit but gives you a paper check instead, all is not lost. You can set up your own direct deposit system that will be just as efficient and effective. The procedure is as follows:
- open both a savings account and a checking account at a conveniently located bank
- decide what amount you want to regularly put into savings
- every payday, without fail, deposit that amount into the savings account and the remainder into the checking account
- forget, for quite a long time, that the savings account even exists, and do all your money-use planning and spending using only the funds in your checking account
- eventually, be very pleasantly surprised to discover that you have been living very well using only your checking account money
- be very pleasantly surprised that your savings account is reaching a size where you can accomplish a major life-plan step (buying a car? paying the tuition for a higher education program?) that requires this much hard-earned—and successfully saved--money