Saving money is hard. Even before COVID, very few people consistently built their wealth by saving. According to CNBC, the average American household had less than $12,000 in savings in 2018! Then introduce COVID, the lockdowns, and people's desire to revenge spend and you get a recipe for very little money in the bank account. But everyone knows that saving is one of the only ways to build long-term wealth. So what to do?
I'm going to be honest, throughout this pandemic, I've struggled with saving as well. From taking out food way more than I should to buying an excessive amount of books, more money has flowed out of my bank account than I'd like to admit. But, in the last few months, I've managed to curb my spending and increase my savings rate significantly by doing a few simple things. In this post, you'll learn about the mindset I've taken that has helped me save more money and also the few quick tips that I currently use.
The Dangers of Social Media
Before we dive into the mindset and tip stuff, I wanted to quickly discuss something that we're all intimately familiar with: social media. Apps such as Instagram, Snapchat, and Twitter which (supposedly) bring us all together and connect everyone.
I'm not going to sit here and be all like: “social media is terrible! Stop using it immediately! It's melting your brain!!!” but I will warn you to take everything you see on social media with a grain of salt.
It's easy to look at someone else's post and think to yourself “mann it sure would be nice if I could have…” or “I sure wish I could travel…” Heck, I'm guilty of it myself with food! “Oh my goodness that philly cheesesteak looks SOO good.”
Although social media is good when used for inspiration, it's NOT healthy to constantly compare yourself to it. It's easy to forget that social media is simply the BEST of someone which they're choosing to put out into the world. What you AREN'T seeing:
- Their bank account
- The struggles they went through
- Their personal life
This is true of celebrities but ALSO true of peers (whom you might be wanting to compare yourself to). Just keep these things in mind the next time you find yourself thinking “hey I want to get one of those…”
What it Takes to Save Money
Everybody has a different mindset. What makes me tick is going to be different from what makes my brother tick and also different from what makes you tick. For me, long-term retirement goals get me going, for you, it might be the potential to make an extra $20 a day (through dividends). So, the mindset that works for me might not motivate you at all. That being said, hopefully, you can glean a few key principles that stand out when I share my own approach to saving money.
The main thing that guides me is something straight out of Morgan Housel's book. In the Psychology of Money, he said this statement which has radically changed the way I see my own finances: “wealth is what you don't see.”
Basically, Housel is saying that there is a difference between wanting to “have a million dollars” and wanting to “spend a million dollars.” Most people will say that they want a million dollars, but in reality they just want to SPEND a million dollars.
In a simple way, Housel makes clear the counterintuitive idea that spending money is the EXACT OPPOSITE of having money. When you spend a dollar, you are subtracting from your net worth, not adding to it. So if you're thinking to yourself “gosh I want to HAVE a million dollars so I can buy a Lamborghini.” what you really mean is “gosh I want to SPEND a million dollars ON a Lamborghini.”
How wealthy someone is isn't based on their possessions. Quite the opposite actually. By saving more money, you are essentially saying no to spending it on stuff. Hence, “wealth is what you don't see.”
Every time I'm tempted to make an impulse buy, I remind myself of this notion and soon the impulse goes away.
Tips on How to Save Money
The three main tips I have which have helped me tremendously with saving money are:
- Using a compound interest calculator
- Automating my savings
- Stopping the constant comparisons with the Jones
Using a Compound Interest Calculator
Warren Buffett once said something like, “I was thinking about getting a haircut, but then thought to myself ‘would I rather a haircut or $100,000' and opted out of the haircut.”
When Buffett says his haircut quote, he is essentially running a compound interest calculator in his head. A haircut costs something like $30 today. BUT, $30 compounded at Berkshire Hathaway's annual growth rate for 30 something years will grow to a MASSIVE sum of money.
We can all run a similar calculation with our own spending habits. Whenever I feel like making a buy, I just pop the cost into a compound interest calculator, set the returns to 8% (S&P500 average returns), and drag the years to 30 years (retirement age).
The resulting number is what I use as the “real cost” and it puts the purchase in a new light. “Do I want a $50 steak right NOW or $1000 in 10 years?”
Automating My Savings
I'm not going to lie: it's hard to send money every month to your savings account.
That's why I simply don't. Instead, I automated my saving so that I don't ever have to look at it and consciously make the decision to save.
At the start of every month when my paycheque hits my bank account, 50% immediately gets deducted and sent to my savings account. By the time I view the account, money has already been saved and I'm not missing out on anything.
You can't miss what you never had.
Stop Keeping Up With the Jones
The last tip that I've been implementing is stopping the comparisons with other people.
I'm a very competitive person by nature, so this tip made the biggest impact on my savings. By recognizing the value in sticking to your own path, I've been able to view all social media posts in a different light and focus on what's really important to me.
Now I rarely go on social media, and when I do it's to seek motivation, not to compare my own situation with others.
Start Saving Money!
Saving money is undoubtedly hard. Even before COVID, saving was a tough aspect of life for many people. But it needs to happen if you want to build any sort of meaningful wealth.
So, here are the tips that I've employed to help me with my saving journey:
- Using a compound interest calculator to remind myself of the true cost of a purchase
- Automating my savings so I don't have to make a conscious decision regarding where my money goes
- Stopping the comparisons between myself and other people
Hopefully, you've been able to glean something from this post that will help you with your own finances. Have a great day and happy wealth-building!
Thanks for reading through How to Save Money and thank you for following along! If you’re a Canadian Student, check out the Ultimate Canadian Student’s Guide to Personal Finance! To learn more about me, head over to this link here. Also, check out this review of Starling Bank if you're looking for an innovative way to save and grow your money! If you want to get exclusive updates and tips, drop your email in the “get updates” box (might have to scroll up a bit.) Let me know your thoughts and suggestions in the comments!
Jeff is a current Harvard student and author of the blog Financial Pupil who is passionate about learning, living, and sharing all things personal finance-related. He has experience working in the financial industry and enjoys the pursuit of financial freedom. Outside of blogging, he loves to cook, read, and golf in his spare time.