There’s are a lot of high-minded financial strategies being written about on the web. But it seems that for most people, finances are a lot closer to the ground. Given that 62% of Americans have less than $1,000 in savings we may need to be concentrating on something much more basic. Becoming a saver is the foundation of financial success. Until you cross that hurdle, all other financial strategies and goals are just pipe dreams.
Why You Need to Become a Saver
Virtually no financial plan that you can can conceive of, read about on the web or in a book, or learn from an expert seminar, is possible to implement without having the funds to do so. Unless you have suddenly fallen into money from some third party source, you will have to save your way to a financial nest egg.
It doesn’t matter whether your plan is to get rich or to get out of debt, it won’t and can’t happen until and unless you become a committed saver.
The reason for this is incredibly basic. Every financial plan in existence requires some amount of spare capital. That will be the case whether you plan to start a business, begin an investment plan, save for retirement, or get out of debt. Each plan will need to be financed with savings.
It’s not an exaggeration to say that any financial plan executed without first having a strategy for how you will save money on a regular basis is little more than a fantasy.
But let’s set high-minded financial goals aside for a moment, and consider and even more basic purpose for having savings.
Saving as a survival strategy. This is a notion that has largely been forgotten in modern America, perhaps because credit is so widely and easily available. But until a generation or two ago, people commonly recognized the importance of savings as a matter of survival.
They recognized that not only will they face emergency spending situations, but also that income could be disrupted. Then there was the desire to avoid debt. In previous generations, people were reluctant to go into debt for fear of the consequences. One way to avoid that was by having adequate savings. It was a way of being “self-financing”, and it largely eliminated the need for credit.
None of those reasons for savings have disappeared – they’ve just been deemphasized in a world gone mad with consumption. But no matter how good consumption feels, it’s a dead end. Only by accumulating savings can you move forward in life.
How to Become a Saver – Living Beneath Your Means
If you have never been a saver in the past, you’ll have to commit to rearranging your finances. That will be necessary so that you can make room in your budget to be able to save money.
At the root, this will require living beneath your means. Whatever those means may be, you’ll have to set your living expenses a little bit lower. This is of course easier if you are a high income earner. Yet I’ve seen people of very limited limited means accumulate incredible savings balances.
It’s possible, but the critical element is getting started.
Start Small, then Increase Your Efforts
Probably what prevents most people from becoming savers is the sense that they can never save enough to build up a meaningful amount of money. That may be true – in the short run – but starting small is the only way to make it happen.
Start by lowering your expectations. If $10 a week is all you can save, then that will work – for now. Once saving that small amount of money becomes normal to you, you can begin to gradually increase it.
That might be a matter of doubling it to $20 per week. If money is tight, then plan to do it immediately after your next pay raise. Alternatively, you can also eliminate a small expense.
This is where giving up certain habits, like Starbucks coffee or cigarettes, can make a big difference. If you can save $20 per week, after one year you’ll have over $1,000 saved. Once you do, your prove to yourself that a) you CAN save money, and b) that you can save even more.
Obviously a saving plan will be more effect the more quickly that it works. But you have to decide for yourself how much you can cut out of your budget.
However long it may take, your first objective should be to create an emergency fund. That’s money to have available not only for emergencies, but also for income disruption. At a minimum, it should be enough to cover your living expenses for at least 30 days.
I laid out a strategy on how to make this happen in The Ten-By-Ten Method to Build an Emergency Fund. The strategy works by saving 10% of your take-home pay each month for 10 months (10 X 10). At the end of that time, you’ll have an amount equal to 30 days of living expenses.
You can take that as far as you think necessary. For example, if you decide that you want to have 60 or 90 days of living expenses in your emergency fund, you can either increase the amount that you save, and/or extend the number of months needed.
Radical Action May be Required
I get what you may be thinking right now if you’re a non-saver – There’s no way I can save 10% of my take home pay every month! If that’s the case, you may have to consider taking radical action.
There are basically two ways to make room in your budget for saving money:
- Cut regular expenses
- Increase income
For a lot of people, it may be true that there’s no extra room in your budget. That may require cutting expenses for products and services that you are used to having. For example, this is where you might start looking at cutting out cable TV, or switching to a prepaid cell phone service.
But it may also be that your basic living expenses are simply too high. In Micro-frugality VS. Macro-frugality I discussed the possibility that the most basic living expenses may simply be too high for your income. For example, if housing is eating up 35% of your take-home pay each month, then it probably won’t matter how many small expenses you cut. After all of the cutting, too much of your income is still going for housing.
It may be that you need to consider moving into a less expensive living arrangement, or even trading down on your car.
Still another possibility is increasing your income. That could mean taking a part-time job, participating in a bonus program at work, or even starting a side business.
Though this may seem radical on the surface, it may be less involved than it appears. You may need the extra income source only until you reach your initial savings goal. The point is, once you become a saver, you’ll probably find it easier to cut expenses, or to blend a modest second income source into your schedule.
The purpose of developing radical savings strategies is so that ultimately you can save beyond an emergency fund. That’s a good foundation, but you will also want to save for medium-term goals, such as buying a new car or replacing the roof on your house. And beyond that, you may also want to invest money for long-term security, including retirement savings.
None of that is possible however until you get started. And taking small steps is the way to do that. More radical strategies can be added as you move forward and become more committed to your savings cause.
Put Your Savings Out of Reach
This is another point that is critical if you have never been a saver. Once you have some money put away, it may be difficult to resist the temptation to use it for some short-term purpose. The best way to deal with this is to save the money someplace that’s at least a little bit difficult to get to. That may at least help you to avoid spending the money on impulse.
For example, you can put your money into a six-month certificate of deposit at your bank. Or you could invest it in US Treasury bills. In either case, the money will be there for a true emergency, but it wouldn’t be immediately available for you to pull out and buy a pair of $200 concert tickets.
This kind of arrangement may be necessary until you become comfortable with preserving your savings for its intended purpose.
The Payoff of Becoming a Saver
We’ve already discussed the basic reasons to become a saver. But there are even more compelling reasons:
Creating a viable future. If you have no savings, you have no investments. That means that your future will be very limited. It takes money to improve your lot in life, and even to retire. If you never have any savings or investments, those will be little more than dreams.
Building a measure of financial security. After the dot-com bust and the financial meltdown, life has become a lot less certain that it used to be. Getting and keeping a job is more difficult. But having a comfortable savings cushion is one of the best protections against that uncertainty.
Getting out of debt. There’s no way to get out of debt until you learn how to live without it. And in order to do that, you have to develop savings and a savings pattern. That will make you more liquid, and less reliant on credit.
Sleeping soundly at night. I’m willing to bet that you’ll sleep better at night after you have a few thousand dollars in the bank. Savings have a way of reducing uncertainty, and that reduces the nocturnal tossing and turning that comes with the question how am I going to pay my bills this month?
Preventing small problems from turning into big ones. Unexpected problems are a normal part of life. But exactly what constitutes a problem depends entirely upon your ability to deal with it. If a $500 expense will become an panic situation, it’s probably because you can’t afford to pay for it. But if you have a few thousand dollars in the bank, you probably wouldn’t even consider it to be a problem.
Creating options. This is probably best explained by example. Let’s say that you have a job that you absolutely hate. But you keep it because your budget is so tightly stretched that you couldn’t afford to go even two weeks without a paycheck. But if you had enough money in savings to survive for say, 90 days, quitting your job will be less disruptive. That’s how savings creates options in life.
If you’re not a saver, put aside other goals like early retirement or getting rich. Becoming a saver is the foundation of financial success. Until you master that financial strategy, all others are wishful thinking.