In my post From Zero to Millionaire I talked about 5 phases that you work through to go from nothing to having financial freedom. The exact order varies from person to person and the amount of time each person spends in each phase varies. The phases also overlap. But anyone that reaches financial security will pass through each one. The five phases are Make More Money, Save It, Pay Off the Debt, Invest, and Create. I talked a little about each of those, but there is a lot more. It would take books and books worth of information to truly cover each one well. Perhaps I’ll do that one day. Today I want to talk about the second one.
The only way to better your financial situation is to spend less than you make then put the rest to work. Part of putting the rest to work is setting some aside so that it can be invested later or used to pay for things in an emergency. So the difference between what you make and what you spend needs to be saved. Most people can save something. However, the historical savings rate in the US has only been about 5%. That’s a good start, but unless you have a ton of time for it to compound you need to save more than that.
We all know we need to save. If the transmission goes out or the kids get sick an emergency fund can make the difference between getting it taken care of and deciding between food and electricity. We need to have at least a $1000 in the bank for emergencies. Most emergencies can be dealt with if you have an extra $1000 sitting in the bank as an emergency fund. Different experts have different recommendations about how much to have in your emergency fund, but you have to start somewhere. A thousand dollars is doable for most people over time, but people still don’t do even save that much.
So why don’t people save?
People give several reasons why they don’t save. I’ll outline some of the most common below and then I’ll outline some of the real reasons that people don’t save.
Reasons that people say they don’t save.
I don’t make enough.
This is a common reason. There are a few people where this is true. The truly poor where every dollar goes only to basic needs. This group will need more income to save. It can still be difficult for others though. When you don’t have a lot coming in it can seem like setting aside extra money is impossible. However, that is not true for the majority of the people in the developed world. If this is the way you see your problem you’re in luck. This is the easiest one to solve. Simply make more money. Easier said than done. I know. There are a lot of ways to make more money. See my Way Too Many Ways to Make More Money page for some ideas. There are countless ways to increase your income.
Things are too expensive.
This is, of course, related to the first one. If all your money is tied up in your expenses then it can be hard to save. Things are expensive. And prices seem to go up every year. This problem can be solved two ways. Either go through your expenses and cut out the ones that are not really needs. I’m sorry, but cable television is not a need. Neither are expensive toys. When you cut something out, put that money towards savings. The other way to solve this problem is to earn more money.
Something always comes up.
This excuse is the very definition of why you need an emergency fund. Or at least a budget. I haven’t talked a lot about budgets yet on this site, but they can be a life saver even if they can also be a party pooper. When I first started setting up a budget I tried to account for everything. I could never get it to work. There were always different expenses each month. A lot of expenses were pretty irregular. I found that it wasn’t really possible to account for everything. So after a long time of trying different things I ended up simply adding a line item to my budget called “Other.” I assign it a dollar value. Then all the somethings that come up go there. It takes some trial and error or at least some analysis to get this number right, but once you do you have this line item accounted for. Now put both this line item and a savings line item in your budget. I’ll do a separate post all about creating a budget.
Why people really don’t save.
Those are the excuses people give for not saving. And if you follow the fixes I listed you can help solve some of them. But to be more accurate here are some of the real reasons that people don’t save.
Keeping up with the Joneses.
When the people we know have new fancy toys with the latest features we want that too. Giant screen TVs, the latest smart phones and bigger houses are all things that people tend to want. Going out to eat everyday can also fall into this category. People don’t always buy these things because they actually want them, but because everyone else has it so they feel they should too. Some people do this because they don’t want other people to think they’re poor. Some do it because they feel entitled since other people have these things. Or people may feel pressured into doing it.
The problem is that this is a dangerous path to go down. You end up spending money on things you don’t need or want simply to maintain an image or to make other people happy. The truth is that most people care more about themselves and what they have than what you have. Remember your priorities. Plan your big purchases in advance, so that you don’t have to buy things on credit. And don’t worry about what others think. People worth spending time with aren’t going to measure your TV to determine your worth. The point is that you should spend your money on the things that are important to you. It shouldn’t matter what other people buy, or what other people think you should buy.
That’s easier said than done though. It took me a while. I’ve gotten to where I’ll straight up tell people, “no I don’t want to go out to eat today. I brought my lunch and I don’t want it to go to waste.” I’ve also said “No I don’t have a TV. I’m paying off my mortgage.” And one other that has worked for me, “Why would I buy that? It’s expensive. I have better uses for my money.” The more you say something along those lines the easier it gets. The people that value you won’t care if you have the latest tech. They’ll also appreciate that you spend your money on the important things in life. Plus, let them be jealous of you when you tell them you went on a great vacation paid for with cash money from your side gig.
I’ll do it later.
This excuse is most common among the younger folk. The younger we are the easier it is to say “I’ll start saving later.” We have this idea that there is plenty of time. Especially when we’re 20 and we don’t plan to retire until we’re 70. That’s 50 years to get around to it. The problem is that it usually doesn’t stop there. Another way to say it is “I’ll start saving when I finish paying for college.” That frequently turns into “I’ll start saving when the kids finish college.”
The result is that we don’t start saving. There is always a reason to wait. Now, here’s a reason not to wait. Say right out of college you get a great job with a $5,000 starting bonus. You’re 22. You can spend it and start saving later, or you can save it and start saving now. Let’s also say that you decide to save it for your retirement by investing it in blue chip stocks like Johnson & Johnson, Coca-Cola, and Procter & Gamble. If you reinvest the dividends, but don’t add any more money to it then at the end of the 50 years, when you’re 72, you’ll have about $1,445,011. That’s assuming that the growth is about the same as it has been the past 50 years. (If you add more to it on a regular basis it’ll be even higher.) Now how much would you have to invest to have the same result if you waited until the kids graduated college? Say 25 years later? That would mean it would have half the amount of time to grow. Would you assume that you would have to put in twice as much? If you invested twice as much, $10,000. Then you would still only have $170,000 when you reached 72. Actually, if you want to end at the same amount you would have to invest $85,000. Look at the table below.
||Age When Invested
||Age at Retirement
||Years to Grow
||Amount at Retirement
In this example you have to start with 17 times as much money to end up in the same place if you want to wait. The most important factor here is the number of years you have to grow your investment or your savings. Not the amount you start with. So, start now. It’s a lot easier to start now with a little bit than to try and come up with a whole lot later on. Then if you have extra that you can add in later that will help it grow even faster.
When we see something that we want, we usually want it now. It always feels good to get that little reward right now. You get what you want now. But you could have so much more if you waited until later. You put off what you don’t want until later. Unfortunately later will come eventually and you’ll have to deal with it. Though it can be nice to get it now eventually you will want more. As we saw with the “I’ll start saving later” example, if you spend the money now to satisfy your instant gratification bug you’re essentially costing yourself over a million dollars.
Now this may seem to be the exact opposite of the last item, but they are related. You want to do the things now that will produce the most value when you need it. You can also delay the gratification of spending the $5,000 now so that you can spend the nearly $1.5 million later. Or potentially live off of it perpetually. Solving this is about impulse control. Depending on the situation you can try a few of these things that I’ve done to help. If you want to buy something expensive decide to wait until tomorrow to buy it. Sometimes having the extra time to think about it allows you to see the value in not buying it. This works well if you’re at the store and see and item that you think you must have. Go home, think about it, and come back to the store the following week if you still feel you need it. Another option is to decide on a plan. If you see something that you want figure out how you’ll pay for it. Ask yourself what you’ll give up to buy it now. I’ll sometimes do a rough calculation of how many hours I’ll have to work to pay for it. Don’t forget to account for income tax. Knowing how many hours of work it’ll take to pay for an item can show how truly expensive it really is. Is it really worth two entire weeks’ pay for that new TV? Or more?
Too easy to borrow money.
This, in some ways, is a personal pet peeve of mine. Banks are too willing to lend money when it’s a bad idea. Pay day loans are also too easy to get. Loans like these are very expensive because they have extremely high interest rates and hidden fees. These can end up costing you even more than a high interest rate credit card. This can make it easy to believe that money will always be available. The problem is that debt can dig you into a hole fast. This can also be a problem if the bank lets you borrow more than you can afford. That’s what got us into the subprime mortgage crises that started the 2008 recession. Banks were lending money to people that couldn’t afford it. Too many defaults on the loans caused a domino effect leading to people losing jobs and their homes. Also, if you can borrow the money and get what you want now why save? The reason? Future earnings are not guaranteed, you have to pay interest to borrow money, and now you have an obligation that limits your freedom. Save the money to buy what you want. After saving the money you may find that what you planned to buy wasn’t really worth it. Then you have the money to spend on something that is. This also lets you collect interest instead of pay interest which will help you save the money faster than you could pay it off.
Friends and Family.
By this I don’t mean that you shouldn’t help friends and family. What I’m referring to is resource sharing gone wrong. Resource sharing is when each person in a group shares what they have for the benefit of the group. Humans are very social and this concept has helped us survive and thrive. It’s important to help others. It’s important to help charities. It’s important to help your family and friends. But it’s also important to help yourself and your own future. What can sometimes happen is that when you are doing better financially that those around you there can be a lot of pressure to “share the wealth.” This is when resource sharing can go wrong. I remember at different times in my life, especially as a kid, that friends would try to get me to buy them things they wanted simply because I had a job and they didn’t. I’d get the “you can afford it. You have a job.” line.
That’s ok to a certain extent as long as you’re not giving away all of your hard work and sacrificing your financial future. Don’t fund their laziness. Keep helping others and maintaining strong relationships. That’s how we survive tough times. But also be sure to set some back for yourself and your future. This will make it easier to not only help you, but to meet your needs so you don’t have to burden others when you do need help. This also allows you to build your financial security which can enable you to help others even more in the future. Everybody’s line is in a different place. Find yours and make sure you set some money back to help your own future.
There are a lot of reasons not to save. But to build your future you need to break free of these excuses and save anyway. Even if it means only saving a few dollars at a time. As we saw earlier time in makes a bigger difference than the amount saved. What are some of the excuses you see yourself using? How do you overcome them?