Wouldn’t it be nice if there was a secret to saving money? Actually, there is. Unfortunately, most experts cloud it with phrases such as “spend less than you earn” or “pay yourself first.” Granted, these are common tips that can be used to help you save money, but if that’s all there was to it, wouldn’t everybody be able to easily save money? We all know that it’s possible to clip coupons, go to the library instead of buying a book, and put a little money aside for a rainy day before everything else, but it’s still hard to get into the habit of saving. That will never change unless you begin thinking about money a little differently.
The secret to saving money employs all of these saving tips, but the real treasure is in how you think about money. You can read all the saving tips you want and every year you’ll start off with good intentions only to find your savings goals were derailed as quickly as your new year’s resolution to go on a diet. The problem is we are all aware of the tools and know what needs to be done, but without the right mindset it will never become a reality.
It’s All About Urgency
Telling yourself that you need to build up an emergency fund or save for retirement is fine, but that’s not enough to truly motivate most people to completely follow through. Walk down the street and ask anyone if they have a solid emergency fund or are saving enough for retirement, and most people will have the same answer. They will admit they aren’t doing as well as they should be even though they realize how important it is. We all do this to some extent. We have the knowledge and know what it takes to reach a certain outcome, but putting everything into place and even practicing what we preach is far more difficult. That’s because we usually look at things at a very high level and our brains don’t place a sense or urgency on reaching that goal.
Think about this for example. Let’s say you wanted to come up with $1,000 this year to put into an emergency fund. That’s a reasonable goal, and one many of you may have had in the past. Even though it’s a relatively small amount of money over the long period of time, how often has a goal like this failed? Be honest now. It’s just $83 a month, less than some cable bills, yet people find any and every excuse to not save up that $1,000 in a year. Bills need to be paid, unexpected expenses come up, the dog needed to go to the vet, and so on. This happens because there is no immediate consequence if you fail to reach the goal, and you’re saving for something relatively arbitrary to begin with.
Now, let’s look at another $1,000 situation. Say you need to come up with $1,000 in one month or else you’ll be kicked out of your apartment. Guess what? Unless you were already seriously delinquent and bankrupt, chances are you will be able to come up with that money in record time. You’ll find stuff to sell, you’ll eat soup and sandwiches from the pantry for a few weeks, and you’ll almost certainly find a way to scrap together $1,000 in an extremely short amount of time. That’s because unlike just trying to slowly build up a $1,000 savings over the course of a year that has no immediate concern, you’re faced with the possibility of losing the roof over your head. This sense of urgency forces you to do whatever is necessary to reach the goal rather than just kicking the can down the road knowing you’ve got plenty of time to catch up.
Some may say this is an apples and oranges comparison, but it’s the underlying motivation that’s the secret here. When you have a money issue come up that needs immediate attention, you generally find a way to make it happen. When the issue is just something you know you should do, yet don’t have an immediate negative consequence if you don’t reach that goal, there are a million ways to put it off and make excuses. This is why saving money is so elusive for so many people. We all know we need to save, either for the unexpected, retirement, a college education, and so on, but since those are usually distant goals lacking severe short-term consequences, it almost always is one of the first things to get pushed off to the back burner.
Set Savings Goals
As previously mentioned, there is little sense of urgency when it comes to long-term saving goals such as retirement. What motivates you to save today when the consequences won’t be felt for possibly thirty years or more? One way to make long-term saving objectives more manageable is to set short-term savings goals. By taking one large goal and breaking it up into many smaller and shorter term goals you can actually begin to take action right away and see some results.
The real benefit of this strategy is the sense of accomplishment you get when tackling a goal and making it happen. When you are able to cross something off your list you feel empowered to build upon that goal and work even harder to reach the next milestone. For example, if your goal is to build up roughly a $5,000 emergency savings account in two years, don’t just focus on the big number. Instead, break it down into smaller, more attainable goals. Maybe you set a goal to save $200 a month. Now instead of trying to achieve this large sum over the course of a few years, you now have 24 very small and specific goals. Every month you know exactly what you need to accomplish, and if you treat it with the same urgency as other expenses and bills that must be paid, guess what? You’ll be far more likely to achieve your end goal.
Setting realistic financial goals and more importantly, writing them down, is an important and often overlooked step in trying to save money. If you want to get serious about saving, try creating a financial goal worksheet. A worksheet like this will go a long way in helping you identify your goals, understand what it will take to achieve them, and then hold you accountable. Read more about creating a financial goal worksheet.
This is the true secret to saving money. Yes, paying yourself first and creating automatic contributions works wonders, but many people never even get to that point because they aren’t thinking about money in the right way or are making excuses as to why it can wait. Create a sense of urgency with all of your goals, big or small. Stop thinking about just an end result that may be years in future and bring it into the here and now by breaking it into small goals you can tackle today. If you can hold yourself accountable to these smaller goals you’ll create these little victories that build off of each other, and the ultimate end result will be that you will achieve all of your major savings goals.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.