Breaking the Savings Barrier

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Last week in It’s High Time to Roll Out the Alt-Retirement Movement the comments thread kept coming back to a common topic: savings. Or more particularly, the lack of it. The biggest obstacle people have in preparing for retirement, and in reaching financial independence, is the inability to save money. In this article we’re going to concentrate on breaking the savings barrier.

Breaking the savings barrier is the foundation for virtually everything else related to finance. Your ability to save money will affect not only your ability to retire, but also the ease (or difficulty) with which you live your life, your relationship with debt, and even the amount of stress that you live with on a day-to-day basis.

Breaking the Savings Barrier
Breaking the Savings Barrier

That’s why breaking the savings barrier is mission-critical if you hope to have something that looks like financial independence. Without it, you’ll never get there.

What is the Savings Barrier?

The savings barrier is an imaginary wall separating debtors and savers. If you’re never able to break through it, you could spend your entire life owing money, but never having anything saved.

Debt and a lack of savings are intimately connected. Credit becomes substitute savings for those who don’t save. Because they’re never able to accumulate savings, they’re forced to rely on credit.

Tragically, the majority of people fall into this category. 69% of Americans have less than $1,000 in savings. That’s probably no more than residual checking account balances, rather than true savings.

In theory, transitioning from debtor to saver should be easy. But if you’re over 30, you already know that theory and reality are vastly different events. Until you break the savings barrier, inertia rules your life. You remain in debt, never save money, and never invest for the future.

There’s even an outstanding chance that you’ll exit this world broke.

The Obstacles to Breaking the Savings Barrier

Unfortunately, there are a few:

Lack of training. If you were raised in a family that never saved money, you probably won’t as an adult. Saving money can seem like an exotic concept.

Intertia. We all get into patterns in life. If one of them is a lack of savings, you’ll automatically carry that forward without much thought.

The discomfort if making a transition. Like going on a diet, engaging in the type of self-denial that it takes to go from being a debtor to a saver can be painful. And since we like easy, we might avoid the effort entirely.

You’re running with the wrong crowd. This is a form of “keeping up with the Joneses” on a very specific level. If the people you run with like to spend money and live well, you can get caught up in that lifestyle. You may be having fun, but you’ll never achieve any level of financial independence.

The “Big Two” Keeping You From Breaking the Savings Barrier

There are two obstacles that need special consideration in the 21st Century:

You came out of the starting gate with a lot of debt. In order to acquire the trappings of the middle-class lifestyle, you may have incurred a lot of debt early in life. First and foremost is student loan debt. Young people are carrying crippling levels of it. Auto loans are another culprit. And finally, there’s everyone’s favorite credit devil, credit cards. If you have too much debt early in life, you could spend the rest of your life digging out. The savings barrier is never crossed.

Economic factors. It’s common to blame a lack of savings on human weakness. That’s certainly a factor, but I don’t like to beat that one to death. After all, none of us are perfect. But there are economic factors that cannot be denied. Wages have not kept pace with inflation in the last 20 years. And in many fields, job security is a thing of the past. People bounce from one job to another, with extended periods of unemployment in between.

Certain expenses, like healthcare, education and housing have risen out of all proportion to reality. Trying to keep up with those expenses is keeping a lot of people from saving money.

There are certainly plenty of very solid reasons why people fail to break the savings barrier. But we’re not here to hang on excuses. We’re looking to fix the problem so we can move forward.

The Payoff of Breaking the Savings Barrier

As daunting as any of those obstacles may be, it can help if you focus on the payoff of breaking the savings barrier. And there are plenty of those as well.

Getting out of debt. Debt happens because you don’t have savings available to pay for what you need. When you become a saver, you effectively become self-financing. And here’s an uncomfortable factoid: you’ll never get out of debt until you’re able to stop relying on it.

Having more options in life. Options open up when you have an appreciable amount of money in savings. It’s easier to make a move to another home or a different location, or to take vacations without feeling guilty about money. You can quit a bad job, or start a business.

Savers win by default. Debtors pay interest and make monthly payments. Savers earn interest, and don’t make monthly payments. They have more control over their income, and seem to get wealthier without much effort.

Maintaining enough liquidity to feel rich. When you have money saved, you can feel rich, even though you aren’t. This is the reason why some people seem to live very well on relatively low incomes, while others struggle at high incomes.

Living with a lot less stress. It’s always easier to deal with problems when the vault is full. You’re less vulnerable to the disruptions that problems bring. This gives you a greater sense of peace, and a reduced stress level.

Having a reasonable shot at retirement. Here’s a newsflash: until you break the savings barrier, retirement will be little more than a wish. All financial endeavors start with being able to accumulate money. If you have no savings, you’ll have nothing to invest for the future.

Savings Goals to Cover

I think one of the factors that keeps people from breaking the savings barrier is an all-or-nothing expectation. If I can’t save $50,000 in the next two years, it isn’t worth it.

Yes it is. But you’ll have to get there in small steps, especially if you’ve never saved money in the past. And even more so if you have a lot of debt. Small victories can also give you the confidence you need to achieve bigger goals later.

Start with an emergency fund. If you have no money saved, this will be a big enough task all by itself. You should have a minimum of 30 days living expenses for emergency purposes. They should be held in a savings account or money market fund. Don’t worry about low interest on this account. Liquidity is more important than return. And you certainly don’t want to put this money into risk type investments.

Intermediate savings. This is money that you save for needs that you anticipate in the next few years. It could be saving money for the down payment on a house, for making major repairs to the house you already own, for an upcoming wedding, or to purchase a new car. It’s easier to save money for these purposes when you have an emergency fund that will insulate you from short-term financial concerns.

Retirement. One of the misguided strategies these days is to begin saving for retirement right out of school. That’s certainly well-intentioned advice, but it ignores other priorities. Young people need to concentrate on more immediate needs, like getting an apartment, a car, and paying off student loan debt, if they have any. It’s also easier to save for retirement when you already have money saved for more immediate needs.

Specific Strategies for Breaking the Savings Barrier

It’s one thing to talk about breaking the savings barrier, but quite another to make it happen. In theory, it’s easy. In practice, it’s incredibly hard.

It requires one of two strategies, and usually a combination of both:

  1. Cutting expenses, and/or
  2. Increasing income

The most basic reason why a person can’t save money is because there’s no room in their budget. It has to be created. You’ll have to do one or both of the above to make that happen.

Exactly how much you have to do either depends on your goals and circumstances. If you have a lot of debt that you need to pay off, the effort will be greater. You’ll probably also have to do both. That’s precisely what scares a lot of debtors off.

Cutting expenses isn’t just one effort, but several

You might be able to get away with clipping coupons, canceling subscriptions, and cutting back on restaurant meals. That’s the usual tonic offered, but it’s probably woefully inadequate if you want to go from debtor to saver. More likely, you’ll have to cut some big expenses.

That may require sacrificial changes, like moving to a less expensive home, or trading down on your car. It might also involve eliminating any unnecessary expenses, at least for a time.

Increasing income is more directed, but also more difficult

Unlike cutting expenses, increasing income will mean adding something to your life, rather than taking it away. That’s often harder to manage. You may have to get a part-time job, start a side business, or take on contract assignments.

My own personal recommendation is starting a side business. Though the ramp-up can be difficult, it’s usually a more comfortable arrangement than a part-time job. What’s more, once you get it up and running, it can become a permanent additional income stream.

Starting a side business based on what you’re good at is optimal. For me, that was freelance blog writing. I always liked to write, even though I never did it for pay. I was able to learn what I needed to along the way. Find a similar passion that you can convert into a side business, then give yourself permission to do it.

One of the big advantages of having an additional income – and the reason why I think it’s more effective than cutting expenses – is that it has the potential to improve your cash flow more than cutting expenses. After all, you can only cut expenses so much. But there’s practically no limit to how much extra money you can earn.

If breaking the savings barrier is looking like a mountain, this is the way to go. If you have no savings, and a lot of debt, increasing income will be a requirement. And if you get a side business going, you can keep it for life. Initially, the extra income can be used to pay off your debt. After that, it can be used to fund your retirement.

Even better, it can be that part-time income that you can carry into retirement. If you won’t have a pension, a side business could be the answer.

More Specific Strategies for Breaking the Savings Barrier

There are two that I’ve recommended in the past. The reason I like them is because they’re simple, at least in concept.

The Ten-by-Ten Method for Building an Emergency Fund. As I said earlier, you need to start with an emergency fund. That will give you breathing room. The concept here is to save 10% of your take-home pay each month for 10 months – 10 by 10.

Let’s say your take-home pay is $5,000 per month. If you save 10% of that – $500 – for 10 months, you’ll have $5,000 saved. That will provide you with 30 days of living expenses.

You can make the strategy work either by cutting expenses by 10%, or increasing income by 10%. Alternatively, you can do both. Cut expenses by 5%, and increase income by 5%. It’s a gradual and relatively pain-free way to stock your emergency fund.

The Savings Snowball. This method is based on the walk before you can run principal. It’s based on Dave Ramsey’s debt snowball, where you payoff your debts beginning with the smallest and gradually move up to the largest. With the savings snowball, you start by building up an emergency fund, which is the most basic form of savings, and usually the smallest most savers have. Once that’s done, you build an intermediate account, and then retirement savings.

The idea with the strategy is divide-and-conquer. You’re taking care of the most basic savings first, your emergency fund. Once that’s done, you’ll have the foundation to begin building longer-term savings.

These are just my suggestions. What’s important is that you select a strategy that will work for you.

Final Thoughts on Breaking the Savings Barrier

If you’re looking to move from debtor to saver, you must take action on this. Don’t spend too much time deciding on the best strategy – you won’t find one!

For many people, the “best” strategy is one that won’t involve any sacrifice. I’ll save you a bunch of time here – it doesn’t exist. A flawed strategy consistently applied is 100% better than a perfect strategy that’s never discovered and implemented.

You must take action. And yes, that will require changing the way you do things. You will need to either increase your income or cut your expenses, or both. Recognizing that reality up front, make your choices and get busy. It’s going to take time to get from where you are to where you want to go. The sooner you start, the sooner it happens.

Instead of agonizing over the discomfort and inconvenience this will bring, instead be purposeful about focusing on the many benefits that will come from breaking savings barrier. Make a list of those benefits. Use some of the ones that I’ve listed, and add others that resonate with you. It will take a healthy dose of motivation to make this happen, and you’ll have to do whatever it takes.

But rest assured that once you get to the other side of the savings barrier, life is going to be a lot better. And many of the dreams you have now will be more likely to come true. Think financial independence and a reasonably comfortable retirement. They can happen when the “vault is full”. But only you can fill it.

Do you have any thoughts on making the transition from debtor to saver? Are there any strategies that you’ve used that help you get there?

( Photo by NASA Goddard Photo and Video )

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12 Responses to Breaking the Savings Barrier

  1. Good call, Kevin. I agree it is a matter of mentality and mentality is changed by changing habits.

  2. Hi Maria–Yes, it all starts with something seemingly small, like good habits. I think it’s easy to overlook this though. Change the habits, change your life!

  3. Kevin, great points. Your article actually made me think of a book I read a while ago by James Montier, “The Little Book of Behavioral Investing: How Not to be Your Own Worst Enemy”. Obviously this book is about investing and not savings, per se. But it does speak to how we view our decisions about money and what influences them. Controlling emotions is key to saving and investing. If we understand what triggers our bad habits, we’ll be better prepared to avoid them. If you haven’t read it, I would recommend picking it up. It’s short and a very easy read.

  4. Hi Sam–That sounds like a good read. I think most things in life come down to mindset. If you set your mind to doing something you will. We can’t be as casual about everything as we think, at least not until the behavior becomes an entrenched habit.

  5. This article brought to mind a course I took as a requirement to a bankruptcy process. Going through that course, which I highly recommend, I got to learn what made my budget work and how to avoid pitfalls. This was most effective for me because I had to deal with having my pay cut to keep the job (five years ahead of the company going belly up in bankruptcy). I learned to differentiate between necessities and wanna-haves items. Eliminating impulse spending was hard but doable and gets easier over the years. I am never getting another bankruptcy ever again. takes plenty of practice, plus you need to stop allowing the pressure of social media to drive your spending. Don’t base your income total on the gross but on the net actual left after paying taxes.
    Use one of those great apps that keep track of your spending and cash use. It is amazing how much we spend indiscriminately without thought. (Yeah those fancy coffees add up)
    I use a combination of on-paper budget and utilization of alerts to ensure I am tracing all use of my funds, especially now I don’t get any raises income, so my aim is to lower whatever costs I can as much as possible, in my case all credit card debt to the bare minimum, What hinders my saving more is the fact that I have taxes taken out of all income to ensure IRS is paid and has to refund me. Tax laws keep changing so much and the level of non-taxable income for retirees is only $25000 total yearly. Anything over that is taxable for federal tax. At least, I am not liable anymore for state and local tax in my state, especially since it has a high SALT.
    Reading, reacting and dealing with what makes your relationship with money is a very big KEY factor. Just like dealing with any habit that needs to be corrected. Thanks for a great article as it made my resolutions even more potent.

  6. Thanks Maria. I think nobody knows how to manage money better than someone who’s been to the bottom and back. Budgeting is really the key to it all. That’s where you create the extra needed to save. But generating additional income is also important, especially for those who are maxed out by high living costs. If you can’t do one or both, you’re stuck in debt forever. It’s a tough transition, but once you break through, all other things become possible. I’ve seen it play out again and again.

  7. I like what you refer to as no perfect way. I’m lucky to have lived like this my whole life. It didn’t happen easily though. There have been plenty of battles and temptations. It is especially hard when you see your friends driving very nice cars, taking big vacations buying big homes with pools. While you save. Drive a 13-year-old car and live in an average neighborhood.

    It is just now turning for me. I took a six-week vacation last summer. All over the country. Meanwhile, these people I spoke about above stayed home and worked because of their debt. Most of their kids are grown but they are still paying off debt from their lifestyle that ended 5 years ago. I’m doing what they want to now but can’t.

  8. That’s the big problem Tim, staying financially conservative in a world where so many live so well, despite their limited financial situations. It’s hard when you have a family and your spouse and kids want what “everyone else has”. Ironically, it’s not that everyone has everything, or does everything, but more that those who do are so darned visible. They set the imaginary standards for everyone else, because they represent the lifestyle ideal. TV makes them look like that perfect family. That was always the hard part for me. I could live a step above a homeless person. Getting the family on board is the hard part. And as you say, once you start seeing daylight (extra savings and income) you start to look like the rich family on the block. Tough transition, but well worth the sacrifice.

  9. I was the wallflower while everyone else danced to the Jones’ waltz. I would take two steps forward then one step back as life has ups and downs. It was hard but worth it. I had to know what I wanted out of life, and learn the difference of desires and needs. Then I went basic to save… a roof over my head, clothes on my back and food on the table. I have took one vacation my whole life and I am on my second vehicle. Your strategies do work. I am sharing this post!

  10. Thanks Deb! And don’t worry about the two steps forward, one step back syndrome. It’s quite normal. Life is messy, and that’s what never gets emphasized in the mainstream media. They make us think that if we’re not moving in a straight line, we’re not making progress. Balderdash! Any progress is progress, even if it happens more slowly and less direct than we (or someone else) thinks it should.

  11. I like ” I could live a step above a homeless person” – sounds like the story of my life.
    Thanks for your ideas – I’m glad I found this area of the Interwebs 🙂

  12. Thanks, Kevin. And that really is true, I could. My kids always question why I have so few wants. But I’m generally happy with my life. I have my faith, my family, my work and relative simplicity, so I don’t need stuff or gold-plated experiences.

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