Self-Control + Planning = Effortless Savings

“It’s like the more money we come across, the more problems we see”. Even after death, The Notorious B.I.G. provides a unique insight into problems experienced by many. It’s no secret that Americans have some work to do on getting better about saving money. As of December 2016, the personal savings rate in the U.S. was only 5.4% according to Trading Economics, down from previous months.  Why does it seem so tough to save money and how can we get better at working towards financial security?

When I talk with friends and other people around my age, I tend to see two common themes emerge that help explain why saving money seems so tough.  The first is living outside your means and the second is not having a clear goal for what to do with your income.  Let’s look at each of these in turn.

Living Outside Your Means

The most obvious issue I find is that people live outside of their means. This isn’t really new news, as a May 2013 report by FINRA indicated that 19% of Americans spend more than their income while 36% spend about equal to their income. Among my peer group I see this happen, especially as people receive raises or better jobs. In mid-2016, a person I know received a rather nice raise at work. Some celebration is to be expected, but here we are in February of 2017 and this individual is still spending and taking on additional debt so that now the higher income isn’t enough. I’ve seen this happen before and it’s a vicious cycle. You increase your income, so you increase your spending and debt load and now you are back living paycheck to paycheck, or worse, beyond your means.

It seems obvious, but the message I try and explain to people is that you should treat a raise as an opportunity to pay off existing debt and start working on an emergency fund or retirement plan. Committing every dollar doesn’t give you any wiggle room should an unexpected expense come up, such as an auto repair or medical bill.

It’s quick and easy to say that this is an irresponsible behavior and might be the result of the individual being immature; but, if that is the case, why do seemingly smart people make this mistake? One explanation could be lack of self-control and giving in to the immediate gratification that is common in our culture. This idea boils down to a “I see it, I want it, I buy it” mentality. Without giving thought to whether a purchase is a want or a need, a person simply buys the good or service. Another explanation is the “keeping up with the Joneses” concept. As people earn more they look at their peer group and see what other people have. If they see everyone else has upgraded their car or their wardrobe, then they are motivated to do the same. This is a dangerous trap to get caught up in and can have horrific ramifications on your financial well-being. A final observation, and this is one I believe is easily avoidable, is that many people lack a plan or a strategy for their income.

No Plan? That’s a Problem

Living outside your means is a problem many people face and I truly believe that if people took the time to create a financial plan they could avoid many of the problems that arise from spending more than you make. A personal financial plan should begin with a budget, listing income and expenses, and what your goals are for the future. Next, create a savings plan. Write down what you want to save money for, how much you will need and when you want to reach your goal. With these pieces of information, expand your plan and create a roadmap detailing how you will achieve your goals using your budget and savings plan as your guide. Taking the time to write down your plan is critical. Simply thinking about it or holding it in your head won’t keep you accountable. Write it down and look at it often to keep yourself in check. Two recent stories come to mind that highlight this idea.

The first is a friend who still lives at home with her family, but wants to move into her own apartment. This seems fair as she is in her mid-20s and has a full-time job. The problem is that she has never written down her goal and the steps needed to be successful. Rather, she will talk about her goal and then go out and spend money in a way that is completely contrary to what she just talked about. Seem odd? I bet you know someone who does this or maybe the person is you. If she wrote down her plan and reviewed it regularly and tracked her progress, she might see that the unnecessary spending is really holding her back. A study at the Harvard MBA program found that students who wrote down their goals, which was only 3% of the students in the program, earned 10 times more than the other 97% of students who didn’t write down their goals or create a roadmap to success. While this is purely a monetary example, it demonstrates that writing down detailed goals can help increase the odds of success. Our individual roadmap provides a description of how we will reach the end goal and makes us accountable. I believe that my friend would benefit from writing down her goal and you might benefit as well with your own goals. If anything, writing out the plan helps us evaluate our strategy, identify holes and create solutions to obvious problems.

The second example is an individual who recently started a side gig and is making more money than expected. I’m very happy for him that he found a way to generate additional income. What I’m less thrilled about is that, rather than creating a plan for how to manage his money, he decides that new clothes and accessories are needed. He talks about saving for his daughter’s college education, but goes off and spends 90% of what he makes. What I see is that he gets some cash, is filled with positive emotion and, before taking time to think, goes and blows almost every cent. It’s not logical. It’s not productive. Again, if this individual decided to write down his goals and a detailed plan, he would know where to allocate his extra income. Upon completing a job and receiving payment, he could consult his financial plan and determine that contributing to his daughter’s 529 Plan is a better use of the funds than buying a new jacket.

A survey conducted in 2015 by Northwestern Mutual concluded that only 20% of respondents had developed a written financial plan. This is shocking considering that 58% of Americans believe they could improve their financial planning efforts. The two individuals I discussed above don’t have a written plan and both of them could very much benefit from creating one.

Conclusion

Living within your means and creating a financial plan to help you do this might be two of the most powerful tools you have to ditch the masses and live a financially sound life. Will it be tough? That depends on your mindset. You will have to be content with your iPhone from last year and might not be able to buy a new wardrobe each summer. In reality, these are not big issues. When you realize that you are debt free and have a solid savings in place, you will feel a level of peace that your co-workers and friends don’t have. Take the time to set a plan and force yourself to live within your means. I promise you the reward of having financial freedom is great and you will be in a small demographic of Americans, only 9% according to the Northwestern Mutual study, who have a financial plan that can withstand the ups and downs of the market cycles.

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