The #1 Key to Saving Money and Bypassing Impulse Buys
As I write this I'm right in the middle of saving for the biggest purchase of my life, to date. I'm saving for a home but the catch is that I want to purchase or build a home and incur no debt. Obviously, the task ahead of me is large so the only chance that I have of achieving this goal in a timely manner is to save a large portion of my paycheck. I don't know about you but saving is a difficult task for most. Seeing the money enter your bank account in a couple of big chunks each month sends a massive shot of endorphins to your brain. It's exciting and empowering. "Look at all this cash!" Subconsciously, you know that money has "House" written all over it, but until you make that transfer into your savings account, it's fair game right?
Knowing that you have the money to spend, just one swipe away, is torture. Especially if you like expensive toys like I do. I'm having to teach myself restraint in spending and diligence in saving. But as with any task, what you SHOULD do is easy to put off until tomorrow and today suspiciously begins sounding like the perfect day to do what you WANT to do. After all, tomorrow is the best time-saving device of today. So the trick then becomes figuring out how I can save tomorrow rather than saving today. Sounds logical right? We're so quick to surrender our future to the present because, internally, it doesn't feel real to us. Leveraging that mental lapse would push many projects through to completion that would ordinarily be pushed to the wayside. It's easy to say "I'll lose weight tomorrow" or "I'll run the errands tomorrow" or "I'll mow the grass tomorrow" and then tomorrow comes and those things get pushed to yet another day.
So here's the system: automate your saving, today, so that tomorrow, without you even thinking about it, money is being transferred from your spending account into your savings account. Now, automagically, you are living up to your commitment to save "starting tomorrow". You see, the problem with saving today is that it's too easy to justify an immediate gratification purchase. When something is only $20 it's easy to justify because in the grand scheme of things $20 is just a drop in the bucket. However as time goes on - $20 here and $20 there - it all adds up until, before you know it, your $500 short of where you had planned to be. So how do you stop from dying a death by 1,000 tiny purchases? The answer lies in limiting your choices.
In a previous post, I wrote on the nature of change. In it, I referenced a book by chip and Dan Heath, called "Switch". They outlined the three things that must take place in order to motivate change. First you must give direction. Secondly you must motivate the heart. And thirdly you must shape the path. When it comes to saving, direction simply means having a goal in mind. If my goal is $100,000 then the direction is fairly clear. While this step seems quite simple, it would amaze you how many people fail here. Their direction is something along the lines of, "Buy a house" or "Pay off credit card debt." These goals, while admirable, are completely useless. What sort of house? A $300,00 house or a $75,000 house? Do you want to buy it in five years or in ten? Are you taking out a mortgage or paying outright? All of these details matter and give you clear direction.
Now I must get motivation, otherwise I'll find myself spending myself to broke in $20 increments and I'll be slow or unable to reach my goal. In order to motivate you toward a particular end (your direction), you must touch the emotional side of the issue so that your heart is playing in concert with your mind. If this doesn't happen, it's too easy to justify minor slip ups because when your mind is tired - weather from a long days work or emotional stress - your emotional side will win out over your mind, every time. Motivation comes in many forms depending on the person. For me, I'm motivated by the thought of living independently of a landlord, a bank or my parents. What drives you may be something totally different. You must find some way to motivate you and then be purposeful about reminding yourself of it often.
Thirdly, you must shape the path which essentially means removing all other options but the one path which you want to take. In my example, I don't want to spend $20 here and there but rather save nearly all of my paycheck so that I can more quickly reach my goal. In order to do this I must eliminate all options but saving. So I give myself a specific allowance - a budget - for perishables (gasoline, food, soap etc.) and a little bit for entertainment so my life isn't completely bland and then I automate my savings. The premise is that if I don't know that money is in my account I won't be tempted to spend it. The way I have it set up is when my paycheck comes in, a specific amount of it is divvied up into various savings accounts. Before I even have a chance to see it and allow my emotional mind to grow attached to it, it's already out of my grasp. This is the key when it comes to saving -- save tomorrow, today.
I'm currently reading the book, "Money: Master the Game" by Tony Robbins. In this book he interviews Shlomo Benartzi of the UCLA Anderson School of Management. He and Nobel Prize winner, Richard Thaler of the University of Chicago, developed a plan called "Save More Tomorrow," built off of this very principle.
This concept is quite brilliant because it allows you to continue living the lifestyle that you have developed for yourself without feeling the emotional loss of putting money aside. Each time to get a pay raise, a little more is funneled into a savings account. In their studies, after five years, 65% of the employees who were a part of the program were saving 19% of their salaries where, before the program, they were saving $0.00. Wow!
Rescheduling your savings from the present to the future where your emotional mind doesn't like to live is a wonderful strategy to bypass the excuses, justifications and slips of the debit card. Give it a shot!