In our last post I discussed (among other things) setting up an automatic savings plan. I’ve received some questions about why this works. If you’ve found that you have trouble starting your automatic savings plan, today’s piece is for you.
I’ve found something awful happens when a dollar appears in my wallet.
I spend it.
Maybe this doesn’t sound like a special revelation, but over the course of the last week I asked a few friends if money disappears from their wallets. It turns out that I’m not alone. After answers that varied from head nods to enthusiastic “I do that too!”’s, I now believe this is a fairly universal trend. Money in your pocket is destined to end up in someone else’s pocket.
This realization spurred another, bigger thought: the inverse is true.
I don’t spend money when it isn’t in my pocket.
This is another truth. I don’t go to ATM machines to take out money often. I avoid using my debit or credit card for purchases that aren’t necessary.
That doesn’t mean I never use plastic. I still spend money if I don’t have an actual dollar in my wallet, but just not as often. Last week we went out to dinner once. I also had a couple of lunches out with colleagues. Those both were on my debit card.
So, I was on the right path, but when I examined places where I could get to money (the ATM or credit card) cash was still being spent. Where did I have money that I never spent? Was there a place where money would always be mine? What about longer term savings? How about my emergency fund?
I haven’t touched that since a major plumbing disaster two years ago.
Then my mind turned to my retirement plan. I have never touched my IRA. The kids college funds have remained intact.
Suddenly, what started out as a small idea became a huge one:
The Further My Money Is From My Wallet the Less Money I’ll Spend.
This is truly a big idea. Especially for creatives who often struggle to save money. We can trick ourselves into saving. You, too, can save much more than you think if you grasp this one concept.
“But I can’t save money, Miata,” you might, in fact, be thinking right now. Why can’t you save? Is it because you don’t have enough money? Ask yourself this difficult question: if you don’t have enough money now, how will you afford to live when you can no longer practice your art or an outside career?
You have to find a way to save. You have to start now. You have to hide money from yourself to be successful, far away from your wallet. If you don’t, instead of suffering a little pain now, you’ll probably face some significant pains later.
Here’s how to begin a new savings program:
1) Budget. Most of us can’t just “throw a few hundred dollars into an IRA for the future.” Wouldn’t that be nice? It’s probably going to take some sacrifice. Maybe you’ll cut out cable television. Possibly you’ll give smaller graduation or wedding gifts to friends or relatives. What if you lowered the amount you spent on home improvement or dining out? You won’t know where to cut if you have no idea how you spend your money.
2) Sign up for automatic investments. This is the key to this entire strategy. Keep money out of your hands. If you have a job with direct deposit, use that automatic plan to save money into a hard-to-reach savings account or directly into a 401k. If you’re saving into an IRA, then have the money automatically invested monthly out of this account. (Investment companies and banks regularly help people set up automatic savings plans. Ask your banker or investment company rep for the appropriate forms.)
3) Tweak your plan, and tweak again. Will you save the right amount? No, you might start out too aggressively, but I’m often surprised to find that once people begin, they soon realize that this crazy automatic investing strategy is easier than they’d imagined. In fact, because they’ve fooled themselves into thinking that they didn’t have the money, they begin a game of hiding larger and larger amounts. It’s fun to watch a non-believer become someone incredibly excited about saving.
Over time, you’ll find that hiding money from yourself becomes a game:
– You receive an unexpected residual check? Hide it in your savings.
– The boss gives you a raise? Raise your automatic savings to hide half of it.
Do yourself a favor and don’t keep money in your wallet where it’ll soon be spent. Not only will this “savings game” help you secure your future, but you just might enjoy yourself, too!