Chapter Eleven
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Practical Saving
This is a chapter dear to my heart. Saving, and eventually investing, became an addiction of mine. After I had gotten myself out of debt I started saving approximately 10% of my income. Every time I received a pay raise I saved 75% of each pay raise and dedicated it towards savings and pocketed the rest. That, along with optimizing my spending habits meant, that by the time I left the military, I was saving a fairly significant portion of my income.
These savings are what eventually paved the way to allow me to invest in and open my business. In saying that, we will not be covering the investing component in this book. But, we will certainly discuss strategies for practical savings.
I think the challenge that most people face, when they think about saving, is that it is simply ‘putting money aside’. While this is certainly true, it a certainly an oversimplification of the process. It does not consider human nature. The problem with this thought process is that human nature often gets in the way.
So although most of us are capable of putting money aside, keeping it aside is something completely different.
As with everything in this book, the most important part is to consider your habit of savings. Have you committed to putting aside $50 every paycheck? But, then by the end of the paycheck you always need to dip into that $50? Do you truly need the $50 or is it because of overspending? In my experience, nearly 100% of the time the reason why people grab funds from their savings is due to overspending.
Don’t get me wrong, emergencies and unfortunate events do occur but for the vast majority of people the real reason they have no savings is because of their money management techniques.
I hope by the time people get to this chapter, they realize that they have to take a deep dive into their spending habits and identify those habits that cause them to spend money they do not want to spend. Once that is complete, only then can savings occur.
The way I like to approach savings is yet, again, from a behavioural standpoint. The action of saving money is fairly straightforward; but, the habit of saving money is the part that needs to be worked on. What I tell my clients is to think of the largest amount of money that, if they had to go without that amount, their lives would not change at all.
Think about it. When you get paid, if you burned $5, $10, or $20, would it impact your life in any meaningful way? This number may change depending on your situation. For some, it might be $5 and others it might be $200.
Whatever that amount might be is the amount you want to begin putting away on a paycheck basis. The more you do this, the more ingrained of a habit it will become. The more of a habit it becomes the more likely you will continue. And the longer you do it, the more you think about its meaning, and you will be more likely to increase that amount you save over time. By the end of this chapter, it should be extremely easy to save the funds. Once this habit is in place it will be very easy, via the other chapters in this book, to free up enough funds to double, triple, or even quadruple the amount you were previously saving.
So, even at the beginning, putting the funds aside should be relatively straightforward. As mentioned before, the challenge will be retaining those funds. So, our goal is going to be to make it as straightforward to send money to our savings account, and make it as difficult as possible to withdraw the funds.
To set this up properly will take a bit of time and a small amount of effort but is very possible. Here are a few options:
• Via an adviser: Most advisers are more than happy to set you up a TFSA to save money in. The best part about this is the withdrawals can generally be setup via pre-authorized debit (automatically out of your bank). Admittedly, this isn’t the best use of a TFSA, however, for our purposes to develop sound habits, and separate our banking from our savings, it will work perfectly.
The reason this works is because, usually, in order to submit a withdrawal you have to ask your advisor prior to withdrawing the money.
• Via a standard bank: This approach is a tad more cumbersome to setup and can be susceptible to our own behaviours, but can be equally as effective. Essentially, most banks can setup savings accounts that are not accessible via debit or web platforms. You can usually set up a pre-authorized debit to that account or a ‘Payee’ to the account, assuming they are held at the same bank.
After setting this up, you generally will have to go to the bank to withdraw your funds. This is good and bad. From an ease of access, it is great because it involves going down the street. At the same time this is bad because it is too easy to do so without explaining why you need the funds to someone you trust like an adviser.
• Via a cash envelope: This approach is the least cumbersome but is the most susceptible to not working due to our own behaviours. This method is simple. Get an envelope, withdraw your cash savings, put the savings in an envelope. Keep said envelope in a safe location. Rinse, repeat, on a per-pay basis.
Saving money becomes more and more addicting the more you do it. I find there are certain barriers that people struggle at, but once they surpass them the need to save becomes greater and greater. Those general savings barriers are $500, $1000, then $2000.
And remember, the initial goal is not to achieve those targets as fast as possible but to instead develop the habit of sustainable saving. Stick with the same amount of money until it is just a natural thought that every payday you put aside your money using whatever saving approach you desire. You will know you are ready to start increasing your savings amount once you are at the end of nearly every paycheck; you have an amount of money left over. The cool part about this is that when this begins occurring, savings becomes ‘easy’.
Just remember to reward yourself. When you hit whatever goal you have set for yourself make sure to treat yourself. Maybe it is going to see a movie, going out for dinner, or whatever else your heart desires.
Ideally, at this point, you will have tackled your bad habits and substantially cut your costs in various categories without greatly modifying your lifestyle.
Let’s wrap it up now!