It can be argued that the concept of saving is largely a lost art.
From a developed-world perspective, there is no longer a stigma attached to debt like there was a few decades ago, so people merrily spend their way into multiple forms of debt without thinking about the future consequences. The ideas of penny-pinching, not buying what you don’t have the cash for, and other forms of saving and frugality – with the goal of someday building a nice nest-egg of savings – have been lost in this world of abundant and easy credit.
In fact, it would seem as though the concept of saving in most peoples’ minds seems sort of ‘fuddy duddy’. Older generations who cared to work their way up from a small, simple house into a larger home did so over the course of decades. The idea of a “dream home” was largely a foreign one, and they moved up to a larger home only if they felt they needed it and could afford it. A home was mainly for shelter and simple comfort, not luxury. They also bought usually only one vehicle and practically drove it into the ground.
Nowadays, the mentality is, ‘Why wait?’ So many people in their twenties and thirties are taking on a huge mortgage for their “dream home”, which is a fancy term for ‘much larger home than you need’ (and which is promptly filled with stuff you also don’t need) – with minimal down payment – and leasing one or more new vehicles instead of saving up cash for an older one. The idea seems to be one of living for today because there might not be a tomorrow.
Develop a Saving Mindset
As might seem obvious, I’m writing from the perspective of a saver, someone who avoids debt if at all possible and actually hates being in debt. Even though my only debt is a mortgage, and what remains is small compared to the vast majority of home-owners my age, I still cringe at the few hundred dollars’ worth of interest flying out the window every month. To me, it’s no different than throwing a bunch of 20-dollar bills into the fireplace. In my mind, there is no such thing as “good debt”. I can’t stand the thought of having any debt, and I long for the day when I’m out of it.
Personally, I look at that few hundred dollars and think of what else I could do with it instead of watching it vaporize into thin air in the form of interest payments. The first thing I would do is invest most of that extra money into the stock of quality companies.
For you, having no debt might mean something different. It might mean a whole lot more in your pocket than just a few extra hundred dollars per month – it might amount to a few thousand dollars per month. It might mean being able to travel more or to buy nicer things with – using cash.
In any case, I’ve learned that the best way to conquer the debt mindset – to get out of debt or to minimize the amount of debt you’re in – is by developing a saving mindset. Folks like Dave Ramsey have a whole lot more to say about the subject of getting out of debt, but I have a few nuggets of wisdom that should also help.
Live within your means
Specifically, what do I mean by a “saving mindset”? In my world, it involves that old idea of living within your means. It means making sure that you don’t spend more than you earn, with the net result being money saved and thus extra money in your pocket and back account. Yes, this is an incredibly cliché financial tactic, but largely because it’s incredibly simple and effective. For your benefit, here are some practical ways that I live it out.
My wife and I were approved for a $450,000 mortgage but we opted for one less than half that amount. This involved a conscious decision to keep our pride in check and to not try to ‘keep up with the Joneses’. Prior to that, we lived in a mobile home – we had little pride to begin with! However, the low mortgage payments meant that we were able to pay it off, so a good chunk of the new house had a nice down-payment from the outset.
Aside from the extra interest payments, we also knew that more square footage in a more expensive house would mean more utilities and maintenance costs.
We also knew that, no matter what the square footage, it would eventually be filled with stuff. If you don’t believe me, then do the following experiment: the next time you or somebody you know moves into a place with more square footage, keep track of how long it takes the empty spaces to be filled. I can guarantee that for almost everybody, unless one makes a conscious decision and commitment, it’s not a matter of if, but when.
The point: By forcing ourselves to live with less square footage, it also forces us to make the best use of our space but more importantly to buy less stuff, most of which ends up eventually being thrown out, given away, or sold at a garage sale for next to nothing compared to what we paid for it. Money that could have been spent on better things like paying down debt.
Live like you have a lower income
If you spend too much and/or are in debt, I think that the best way to develop a savings mindset is to live as though you don’t have a lot of money. Maybe that means pretending to go back in time (and income) and make spending decisions again like you did as a young adult. For most of us, those days meant more lint than money in our pockets. Most of my generation also had no easy credit, so if we didn’t have the cash to go out to eat or to a movie or on that trip, we simply didn’t go.
So if you were a student, does that mean moving back into the crowded dorm and eating mac and cheese again? If you weren’t a student and instead started out in the work world on a low income, does that mean going back to living on only the most basic necessities?
If you’re under a pile of debt and really want to get out of it, then the answer is, “YES!!” I’m sure they wouldn’t allow you back into the dorm, but maybe it means going back to mac and cheese for a time.
If you leave Costco with way more than you planned to buy when you arrived, then it’s time to cancel the membership, set a weekly maximum spending amount for groceries, carry that amount as cash in a separate groceries wallet or envelope (à la Dave Ramsey), and use only that money for your groceries. Once the money’s used up, no more groceries until the next pay-day – no exceptions.
If you have too much house and not enough money, then it’s time to downsize.
In other words, learn to make spending decisions like a person with a much lower income, and the only way to find out how much you have to spend is by learning how to create a household budget.
Do I advocate this sort of lifestyle adjustment for those of you with a nice nest-egg or minimal, shrinking debt? No, because it’s obvious that you already know how to handle your money properly. But if you’re under a pile of debt and really want to get out of it, read a Dave Ramsey book but also take this idea of living like you have a lower income into consideration.
Put another way, if you earn $50,000 per year, don’t allow credit to justify spending as though you earn $70,000 per year. If you already have debt, then you need to spend as though you earn less than $50,000 per year. If you have $40,000 in debt, for example, then perhaps you need to budget to live on $35,000 per year until your debt is paid off.
What does saving have to do with investing?
I realize that this idea of savings is a departure from my normal discussions about investing, but
- you can’t invest unless you have extra money, and
- you won’t have extra money unless you can learn how to save money, and
- you can’t save money if you spend more than what you earn, and
- you can’t know the status of your earnings versus expenses (what you spend) until you learn how to create a household budget.
The key reason why “the rich get richer and the poor get poorer” is not due to a government conspiracy. It’s not fate or bad karma or bad luck. It’s because people who manage their money well usually have extra. Some of that extra they are able to invest. Because they’re money-smart, they’re going to be careful about what they invest in, which means they’ll likely make a return on their money instead of losing. They’ll likely also have the patience to allow those investments to pan out and beat inflation over time, often handsomely. The net result is often more wealth, and as their wealth compounds, the ordinary person who got rich gets richer.
On the other hand, the people who manage their money poorly never have extra to invest with or they get into debt. Once in debt, it’s only through learning how to become money-smart after the fact (again, read Dave Ramsey books for example) that they can get out of their debt hole and begin to have extra money in their lives – money not just for investing, but also for unexpected expenses and emergencies. However, those who think that somebody else is responsible for ending their financial woes will stay poor and only get poorer.
I hope that this has given you a different perspective on how to handle your money, because if you’re not serious about learning to control it, then – excuse me for another cliché – money will start to control you.
If you’re a brand-new stock investor – or still thinking about it – then I highly recommend the free e-book, Should You Consider Stock Investing? It could become one of the most beneficial 30-minute reads of your life.
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To new beginnings!