“Start Thy Purse to Fattening.”
-George S. Clason, The Richest Man in Babylon
Saving money takes discipline, commitment, and motivation, but it is entirely possible to do on almost any income. As a matter of fact, people who amass great wealth tend to be those who start savings habits when they are of modest means.
“But I Can’t Afford to Save!”
Perhaps your mind is protesting, “But but there’s nothing left over at the end of the month!” Or, as Clason puts it, “How can a man keep one-tenth of all he earns in his purse when all the coins he earns are not enough for his necessary expenses?”
Just as millions before you have saved money, even in tougher times than these… just as people in countries who less than their American counterparts save substantially more than their U.S. counterparts… so can you. You just have to change your mindset and make it a necessity.
In 2011, the household savings rate for the United States was 4.7%, up from below 3% prior to the recession. However, the savings rate for France, Spain, Portugal, China, Germany, Belgium, Australia and Ireland were double or triple that of the U.S. savings rate! (This was in spite of high taxes and unemployment in some countries.) The secret? Saving money is not considered optional in those cultures.
Yahoo! Finance published the story of a frugal family of four who have succeeded living on a mere $14,000 a year in Las Vegas, NV. A temporary choice, they whittled down their budget for a period so that Army dad can complete a college degree while mom stays home with their young children.
How did they do it? They got very clear about their priorities, what their “needs” were vs. “wants.” They cut the cable, stopped eating out, learned to cook and budget. And they prepared: when dad was on active duty (and earning more), they saved diligently, socking away tens of thousands of dollars in a short time. This gave them flexibility when it came time to “tighten their belts.” The couple purchased a car and even their home (a $28,000 foreclosure) with cash.
“Now I will tell thee an unusual truth about men and sons of men. It is this: That what each of us calls our “necessary expenses” will always grow to equal our incomes unless we protest to the contrary.”
In 2013, many of us consider a smart phone, a personal computer and a laptop, cable TV and a large flat screen TV to be “needs.” Now, we can appreciate all of these things, but we encourage our clients to be mindful of where their priorities lie, and to be willing to make spending choices that don’t interfere with their financial health.
Four Ways Saving Money helps you Save MORE Money
One great thing about saving is that the more you save, the more you CAN save:
1. Eliminate the use of expensive “emergency funds.”
As discussed in our last post on Emergency Funds and Opportunity Savings, it’s essential to have adequate emergency funds. But what is “adequate”? Typically, it’s more than what people are saving. An emergency fund of $10,000 may sound like a lot of money, but when work or health is interrupted, it can disappear very quickly, leaving people to use credit cards or borrow money elsewhere.
Retirement accounts are, unfortunately, the new emergency fund. As the Washington Post reported in January 2013, 28% of 401k participants reported having loans against their 401ks. Seven percent have taken hardship withdrawals, and more than two in five employees with 401ks simply cash out their retirement accounts when they change jobs, incurring hefty taxes and fees.
There are two ways to combat this disturbing trend: first, save more, and secondly, put your money in places where you won’t be charged taxes and fees (or have to qualify for a “hardship”) to use it.
2. Save on Insurance by Raising Your Deductibles
If you’re like most Americans, you’ve got car insurance, home (or renter’s) insurance, health insurance, life insurance, perhaps dental insurance, disability insurance, and any number of other types of insurances. With most types of insurance, you pay a deductable before the insurance covers any losses. And this is where your savings can save you more money!
Without ample savings, consumers feel compelled to pay high premiums to avoid paying high deductibles should they have insurance claims. This is precisely what the insurance companies WANT you to do!
In most cases, you’ll be ahead in the long run if you can raise the deductibles on your insurance policies, thus lowering your insurance costs (and helping you save more!) To see how this works with health insurance, see our article on Health Savings Accounts, an effective tool to save on both taxes and healthcare costs.
3. Save by Not Taking Unnecessary Investment Risks
One way we see lots of people lose money is trying to “make up for lost time” with their savings by taking on risk in the stock market. This is a poor and unsafe strategy, and investors would save more if they focused less on their financial offense and more on their defense. Gaining short-term points (or dollars) doesn’t make sense if you ultimately lose more than you’ve gained. A healthy savings habit will take away the impulse to gamble.
4. Save by expanding your consciousness.
When you commit to saving steadily, you expand your mindset as well as your money! Not only will you become more aware of what you spend, but you’ll also expand your comfort level with “having” money without feeling you have to spend it. If you are not comfortable saving, you’ll feel that money is “burning a hole in your pocket” and you’ll find a way to get rid of it.
Oddly enough, lottery winners are TWICE as likely to declare bankruptcy as those who have never won the lottery. Apparently, a jackpot is no match for a scarcity mindset. But a prosperity mindset will create wealth – with or without a windfall.
It’s Worth It.
At the end of the day, you’re not going to regret missed lattes and all the other little “wants” you gave up… an appetizer here, a newer car there, a gadget, a knickknack, the privilege of a designer label. When you learn to save regularly and substantially, you’ll realize that all of the small choices to spend less translate into substantially greater CHOICE when it comes to the important things.
“Which desirest thou the most? Is it gratification of thy desires of each day, a jewel, a bit of finery, better raiment, more food; things quickly gone and forgotten? Or is it substantial belongings, gold, lands, herds, merchandise, income-bringing investments?
“The coins thou takest from thy purse bring the first. The coins thou leavest within it will bring the latter.”
Not sure what’s Up Ahead? Neither are we! That’s why we prefer to be prepared for any contingency, rather than “plan” on the stock market or any other unpredictable investment behaving in a certain way. For this reason, we encourage all of our clients to have emergency funds as well as “Opportunity Savings,” both in simple liquid savings accounts and in cash value policies, where savings can grow tax free and be used or borrowed against with no hassles. Contact us to find out how.
All quotes from George Clason’s classic, The Richest Man in Babylon, recommended reading for anyone who wants to save more money!