Is saving money only for the wealthy?
Most advisors and financial experts will tell you that the only way to become wealthy is to save. The good news is that this is not true. There are ways to become wealthy without saving. For example, you can inherit money, win a lawsuit settlement, start a company with borrowed money and sell it, or start a Ponzi scheme. If the first three are not practical and if you have a conscience and prefer not to spend 10 to 20 years in prison, sadly you will need to save in order to become wealthy.
Why do I say sadly? The problem with saving is that most people get more value and joy from consuming their extra money than they get from saving it. If you fall into this camp, when faced with the choice of getting immediate joy from buying something right now versus saving for some distant time in the future, buying whatever today is a much more attractive choice.
We value now more than we value later.
Here’s why saving is so difficult. Imagine you and I were going to meet a week from today. For our meeting, I want to offer you a snack. You can choose a fruit or chocolate. Which one do you want?
When researchers did this experiment, they found that 74% of participants said they wanted fruit a week before the meeting, but on the day of the meeting, 70% decided they wanted chocolate.
So what’s going on here? Why did so many people say they wanted fruit only to change their mind to chocolate? It’s the same reason why it’s so painful to save for the future when instead we could spend the money today.
Those who chose the fruit were trying to make a healthy decision. Since the snack was a week away, it was easier to make a smarter choice. But when it came down to actually eating the snack, most of them changed their minds and decided to go for the less healthy snack instead.
We put a HUGE amount of value on right now and very little value on not right now.
One more quiz…which of these would you prefer:
- 15 minute massage now
- 30 minute massage in one day
If you are like most people, you said give me the massage right now (#1).
Okay, how about now?
- 15 minute massage in seven days
- 30 minute massage in eight days
Did you choose #2 this time? But why? The massage times are the same and the time between them is the same. What’s going on here?
The same effect is at work. We want it now; whatever “it” is – chocolate, massages, spending, etc. Now rules and tomorrow drools. Having a little piece of goodness right now is so much more rewarding than having a whole lot more goodness in the future. Right now has so much more importance than the future that we are willing to experience less as long as we get it right now.
Can you see how this can really screw up our desire and motivation to save? The experts say, “Save your money today so you can have a great retirement,” but what we hear is, “Deprive yourself of that awesome thing you can experience right now because in forty years it might help you.” Forty years?!?! I don’t know what I’m doing in 40 minutes and you want me to hit pause on the joy button because something is going to happen in 40 years?! Not gonna happen.
Does this mean we are destined to spend a lot and save a little? If the choice is between guaranteed enjoyment now versus the possibility of enjoyment a few decades from now, then yes, we’re screwed.
What’s the Solution? Set it and forget it!
Flip the script by eliminating your choices. This is done by creating a systematic savings strategy. I think willpower is overrated. Rather than to put yourself in a situation where you have to decide between now or later, it’s better to avoid the decision altogether.
The solution is generate enough willpower to set up your systematic savings strategy once and then you can forget about it. Here’s how you can do it:
Contribute to your 401(k).
This is an easy way to save because you set it up once and then it runs automatically without any effort or decisions from you in the future. Basically what happens is that every time you get paid, a small piece of your paycheck gets split off and put into your 401(k).
The advantage of this approach is that the money doesn’t reach your bank account for you to spend. It also has the benefits of potentially saving you taxes and you may even get free money from your company – called a company match. If you pay little or no income tax, there may be better strategies, but for most people it’s a great way to save.
Use direct deposit.
Direct deposit is also an easy way to save effortlessly. The advantage is that you only have to make the decision to save once. After it’s setup, it will run behind the scenes automatically.
Instead of receiving a check that you have to bring to the bank to deposit (this takes way too much time and willpower), your paycheck can be automatically and directly deposited into a bank or investment account for you.
Take advantage of automatic transfers.
If your employer doesn’t offer direct deposit, you can still create a systematic savings strategy. Use automatic transfers through your bank to transfer money from your checking to a savings or investment account.
For example, you can tell your bank that you want to schedule an automatic transfer of $200 on the 1st of every month from your checking account to your Schwab investment account. These automatic bank transfers are slightly more time consuming to set up, but once they are, they run automatically without any other effort or action on your part.
Make the most of technology.
There are quite a few apps available that can make saving easier. They range from unobtrusive (e.g., rounding up on purchases and saving the difference) to extreme (e.g., pulling money out of your bank account based on the application’s algorithm). Because apps and technology change so quickly, the best bet is to search “apps to automatically save money.”
The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.