Back during my adviser days, I was often asked: “can you show us how to save money?” Now on the surface, the question (and its many variants) appeared quite the simple problem for trained money professional like me. But in fact, their question was actually asking me to produce what was tantamount to the ‘holy grail’ of financial planning!
That’s right; the ability to save money is probably one of the most elusive of the ‘money arts’. In fact, it’s probably simpler just to draw a map to the lost city of El Dorado, rather than explain and instil any concept of saving.
Now, this is certainly no slight on the abilities of my clients by the way. They are simply the ‘victims’ of living in a consumer society. For better or worse the country relies on consumption in order to function the way we like it.
All those nice houses, cars and household goods we have, along with with with the roads, hospitals, and police forces et al, are literally the product of a system requiring us to consistently earn and spend money.
Now I’m definitely no economist, but our lifestyles are heavily reliant on the whole populace consuming. This simply means we need to continue spending money rather than save money. In fact, the great economist John Maynard Keynes even posited a concept referred to as the ‘Paradox of Thrift’ describing the economic need for people to actually spend as opposed to saving.
So we’re constantly bombarded with advertising messages, endlessly cajoling us into consuming on a steady basis. In fact, even our banks, established to safeguard our savings, only ever seem to advertise their loans and credit cards. Can you even recall an advertisement for saving money? I certainly can’t!
It can, therefore, be pretty tough for anyone in such a consumer-driven society to resist all the spending stimuli being thrown their way. This, of course, makes it almost impossible to put anything aside.
As a result, the answer to saving money can’t be quite as simple as “just put a bit away from each payday”. Nope, unfortunately with the whole damn economy against us, we need some pretty good strategies, and, a great deal of will power to be successful.
Boosting your willpower
Now just saying “I want to save money” won’t cut it. As I’ve said earlier we have far too many temptations wanting our money and most times we give in without much of a fight! So what we need to do is evolve a regimented approach to the task of saving. This’ll not only fill us with a desire to succeed but also fuel our willpower in order to do so.
Which is best accomplished like anything else you seriously aspire to. And that’s by turning it into a tangible goal and then creating a plan to achieve it. By doing so, you’ll move from just ‘wanting it’ to actually having a systematic approach to actually achieving it.
You need to set a goal
So first and foremost, decide on the reason you’re saving because “I want to save some money” is far too vague. You really need to set yourself a goal, and that goal needs to be specific because if it’s not, you’ll never know when you’ve achieved it. Now, in order to avoid “reinventing the wheel”, I have a post about setting goals – and here’s the link.
It’s about the S.M.A.R.T. system of goal setting. Make sure you take some time to read it and absorb the information. Remember, goal setting is an ongoing process, as you achieve one; you plan for the next, and so on.
And, make sure to write down your goal – commit it to the keyboard, so to speak. By making it tangible will actually give you, a much stronger relationship with it. If it’s kept just in your mind, the other ‘million’ thoughts you have will crowd it out and eventually push it into the background.
Here’s a post to help with some additional motivational techniques.
So that’s willpower taken care of! Easier said than done, I know, but by creating an actionable
S.M.A.R.T. goal will certainly go a long way to keeping you on track.
Here’s one I prepared earlier
Let’s start with the goal of building an emergency fund. And what exactly is an emergency fund? It’s simply a cash buffer for when those unexpected financial crisis’s hit. Emergency funds are the foundation of good personal financial planning and avoid the use of debt when financial demands crop up. Credit cards should never, ever, be considered as an emergency fund.
I have always advocated an emergency fund should be at least $5,000. So start with that figure and add or subtract whichever suits your situation. By the way, here’s some greater detail about emergency funds.
As an aside, albeit an important one, make sure you fully understand the differences between when you are saving and when you’re investing. We are discussing how to save money. This is quite simply, accumulating for the purpose of spending at a future date e.g. house, car, holiday, etc. Whilst invest- ing, on the other hand, is accumulating funds and retaining them to create wealth.
And because we are saving money, it is important to select the right facility in which to store our saved money. Any savings, including our emergency fund goal, should always be put in cash deposits. You need quick access to these funds at some point so you don’t want them losing value or tied up for long periods as is typical with investments.
Check out the post savings versus investing here.
Oh, and when you’re saving to invest, accumulate funds in a bank account until you have enough to commence your investment program.
Now you need some strategies
More than likely, the only income you receive is a salary. And no doubt it is the same amount each payday. Of course, you may also earn commissions and/or bonuses but these tend to be sporadic and shouldn’t be counted on. (If I recall, a lot of companies I’ve worked for in the past always changed the ‘goal posts’ of incentive schemes to avoid paying out money! Hahaha – but that is a whole other story.)
Anyway, as a result of having a stable pay packet, your saving endeavors begin with cutting down on expenditure rather than through gaining any largesse.
A pay packet, being a limited resource, can only be spent until it’s exhausted. After that, you either stop spending, or you access the myriad of credit facilities conveniently available (at exorbitant interest rates!)
Quite simply, in order to be successful at saving money, you definitely have to stop spending once your pay has been used up i.e. toss the credit cards. And to do this, you have to examine just what you’re spending and decide what’s important, and what isn’t.
So the first part of the saving process is best done in a written format. You just list all of your expenditure. That’s right every bit! And it should be done over a 3 monthly period. This ensures you have accounted for bills that occur monthly and quarterly. Now it’s your choice to either look back, or start jotting down stuff as it occurs.
You’ll need to be able to record and itemise accurately, each and every little bit of spending your doing. (And I emphasise the word ‘accurately’) So use an app or automated device at your disposal or simply revert to pen and paper. Whatever way, make sure you are getting it all down.
Next step, transfer this information into a spreadsheet. There are plenty of suitable ones available online so have a bit of a search. For example, here’s one from the ASIC My Money site. And, let’s not forget your own creation if so inclined.
Having now created a digitized ‘budget’ it now becomes a simple matter to see what you’re spending, and what money, if any, is left over.
I’ll refer to this as the baseline budget. And just like when looking for directions, you first need to know where you are. Well, the same goes for saving money. This baseline budget tells you exactly where you are right now. All that’s needed now is to find how to get to where we want to be.
You need a to-do list to help you save money
Some items for your to-do list
Having created an accurate reflection of where you are, and no doubt deciding it’s not where you really want to be, it’s time for some critical evaluation of your expenses.
This is the task of separating your spending into two main categories; ‘needs’ and ‘wants’. Now, for this purpose, defining the word ‘need’ and the word ‘want’ is vital. It is through their definition that you’ll be able to classify your spending and decide which are important and which not so important – so no ambiguous descriptions are.
‘Needs’ would be defined as spending that’s vital for your survival. A ‘want’ on the other hand is something you have a desire for, but you can always forego. Now, I can assure you, that the debate about what constitutes a ‘need’ and what is a ‘want’ is ongoing, but this isn’t the forum to enter it. Rather, for this exercise, you just need to fashion your own tight definitions for each and stick to them.
Remember, it’s “commitment time” so you really need to ‘double down’ and be brutal. Which means stuff like; nail polish, board wax, Bluetooth speakers, hair gel, takeaway meals, magazines, chewing gum, et al, are never going to be classified as needs, no matter how much you think your life depends on them! Got the picture!
So start by going through every one of your monthly expense items and decide whether they are
needs or wants.
And here are some actions
You have three options available to you when you’re examining your spending patterns. You can
- Maintain the particular expenditure as is
- Eliminate the expense altogether
- Reduce the amount of the particular expense
Now when you’re reviewing your expenses there are going to be certain items that you actually need in order to function normally. Stuff like rent, transport costs, loan repayments, food and utilities etc. These are your ‘needs’ and are critical to your lifestyle.
All your remaining expenditure items become ‘wants.‘ This type of expenditure is certainly not critical to your wellbeing and you can easily function without it. So it becomes a decision on whether you stop spending the money and eliminate it.
And failing totally eliminating the expense you can examine exactly where cost savings can be made. That’s done either through substituting for a cheaper product or by reducing your consumption of a particular item. So it’s time to shop around, compare prices and get some quotes. And you can do this to both your needs or wants expenditure.
Note: Whatever actions you intend taking, remember, every item classed as a ‘want’ can be eliminated or at least reduced.
The final stage
Ok, now you’ve decided what are needs, and what are wants, and you’ve settled on a form of action for each one. Now it’s time to re-enter the expenses into another spreadsheet.
This time around, with your expenditure, reduced you should have some money left over. Your sur- plus though being a reflection on how ruthless you’ve been cutting down on your wants and tempering your needs.
However, this won’t be your final result. Optimism will have played a role during these early stages of cost-cutting. For example, you may have decided to forfeit the weekly train tickets in exchange for a leisurely 40-minute walk to work. But with the onset of winter, a dodgy knee thanks to 5 seasons of netball and the forecast of rain for the next 4 days, making any benefits from saving money suddenly evaporate.
So temper your resolve somewhat in order to achieve consistency with your savings. Recall the SMART goal setting concept; always set realistic goals. And be thoughtful of what you can achieve regularly to ultimately be successful.
So now you have found where you are now, and, determined where you want to get too. And most importantly you know what’s required to get there.
Saving money is serious
So it’s now time to get serious and begin by taking a long hard look at the type of consumer plans you’re on for power, gas, phone, internet and TV streaming. At the very least, don’t ever be set-and- forget consumers. Companies rely on busy lifestyles and apathy to keep consumers on the most lucrative income stream for them.
So when an executive of a consumer company stresses that the customer is king, you can certainly laugh uproariously as they’re just having a joke!
So I would imagine that there are many households that could actually save a lot just by visiting one of the many online comparison sites. No need to do a ring around anymore. It can all be done on the train trip to work.
And while you’re at it, find a site that compares your car expenses. Are you really on the best deal for car insurance? How about your health insurance, your personal insurance, and your home and con- tents insurance? You name it; there is an absolute cornucopia of information available at our finger- tips enabling any of us to do some pretty serious budgeting.
Importantly, make sure to keep in mind that you’re comparing apples with apples. Cheaper prices could actually be because you’re being quoted for lesser benefits than what you’re currently getting. So be on your guard when shopping around.
If you have a home loan, are you really on the best deal? This is an area where you can save an absolute plethora of money. Banks are the kings when it comes to not caring for their customers. (Refer to The Banking Royal Commission for all the evidence you’ll need!)
Always shop around widely as there are many 2nd tier financial institutions who offer some pretty good home loan deals. With interest rates at historic lows, it is a perfect time to really get some worthwhile savings. Again, just make sure you are comparing your apples with apples, and don’t for- get how important the loan comparison rate is.
It’s also a good time to see what you can do to pay down your home loan. Nothing creates extra money quite like paying off your home loan, that’s for sure. Here’s a link to help you.
In fact, eliminating debt is a great starting goal, so total up all your consumer debt, and aim at paying it all off. Once that’s done, you can really get some serious money-saving done.
And then, of course, there are those ubiquitous lifestyle costs. It’s time to answer the question “what services do I use now that I could perform myself”. You can always save lots of money this way: You know the ones, the $4 coffees, café bought cakes, take away lunches, clothes ironing at the dry cleaners and dare I say it, beers after work! Maybe it’s time to try the DIY approach and to save big. At least see what you can substitute or reduce!
Now I haven’t mentioned anything about all those “out of the blue” windfalls that certainly help to achieve your goals. Tax refunds, inheritances, bonuses and pay rises. All can occur and at some stage and will contribute to your savings goal. Additionally, there are many other methods to create extra funds through a variety of side hustles. I have some of these listed here.
So good luck with your savings, thanks for reading and see you next time. Homepage
