Saving money is like exercise. You know you should do it. You know there's upside. But it's hard to draw a straight line between the effort it requires and the reward it generates.
J.D. Roth, founder of Get Rich Slowly and author of Your Money: The Missing Manual, does a nice job connecting those effort-reward dots. What I enjoy most about his advice is that it works with human nature. It acknowledges each person's unique situation. Roth isn't into the generalist advice you typically find in financial circles.
I had a chat with Roth recently where he outlined five tips and techniques that can take the pain out of saving. You'll find those below. Please feel free to add your own savings tips and financial advice through the comments mechanism.
1. Saving is mental ... and easier if you avoid advertising
J.D. Roth -- I often say that "money is more about mind than it is about math." By this I mean that financial success is more about mastering the mental game of money than about understanding the numbers. We all understand the basic math, right? The math is simple; it's controlling our habits and emotions that's hard.
Saving can be really tough for some people because it involves giving up a sure thing today for an uncertain future. You know you could find a use for your money right now, but who knows if you'll live to actually make that down payment on a house, let alone last until retirement? But when you find ways to incorporate saving with your personal goals and values, it makes all the difference. If having a family is important to you, and you want them to have a secure home, then it becomes easier to pass up that ski weekend with friends in order to save for your down payment.
One of the best ways to win the mental battle to save is to reduce your exposure to advertising. We're marketed to and advertised to all of the time. And these corporate giants have spent millions of dollars learning the best ways to subtly influence our actions. Even if we don't think advertising affects us, it does. Fight this by ignoring ads, or by learning to question their premises.
2. Customize your saving (or, how to create your own Wii account)
J.D. Roth -- Each of us is different. We have different goals, we have different skills, and we have different mindsets.
My wife, for example, has always been a dedicated saver. She started tucking away 10 percent of her very first paycheck, and she's gradually increased that over the years as she's received raises. Now she saves more than 25 percent of each paycheck! She's able to do this without any sort of tricks or games.
I, on the other hand, always struggled with saving. In fact, for years I didn't save a penny. It was only once I set up automatic transfers from my checking account to my savings account that I was able to make saving a habit. Now I don't need those automatic transfers, but they helped me get started.
Also, don't think of saving as a chore. Think of it as the golden ticket to getting the things you really want. I set up what I call "targeted savings accounts" at my bank, and I use these to save for my goals. When I wanted a Nintendo Wii, I opened a separate savings account at my credit union and I called it "Nintendo account." The teller laughed at me, but she understood what I was doing. It helped me save.
Each person needs to find a savings technique that matches her goals and abilities. If one method doesn't work, try another. Keep looking until you find a technique that works for you.
3. Starter goals: vacations, cars and retirement
J.D. Roth: -- A great way to develop the savings habit is to save for a vacation. We all love to take trips, right? Save for a fishing trip to Alaska. Save for a cruise to Belize. Save for a three-week tour of Paris. Whatever strikes your fancy. And once you've developed the saving habit, apply it to more practical things.
Another great goal is to save for a car. Too many people allow themselves to be trapped by a lifetime of car payments. It doesn't have to be that way. Develop a system that allows you to pay cash whenever you go shopping for a new vehicle. Earn interest on your car money instead of paying interest to somebody else.
And, of course, you should begin saving for retirement as soon as possible. This can be tough to do, especially if you're young. You think you've got decades to go, so why start today? You could use that money for a ski trip or a new iPad. But the sooner you start, the more time the extraordinary power of compounding has to help your money grow. If you don't think you can afford to (or want to) set aside 10 percent (or 25 percent, like my wife), then start small. Start with 5 percent. Or even 1 percent. Develop the habit and increase your saving with time.
4. Limit your long-term goals and keep track of short-term tasks
J.D. Roth -- I only set a handful of long-term goals at a time. In fact, this year I only have one long-term goal. If we set too many goals, we spread our attention, and we're less likely to accomplish any of them. But if we concentrate on just a handful of things at once, we're more likely to do what we dream.
But while I don't have many long-term goals, I have a bunch of stuff I want to accomplish in the short term. To stay focused on these tasks, I use a simple but brilliant system I learned from Erica at erica.biz. I start on the first page of a spiral notebook. I make a brain dump of everything I have to do. Then I put the date at the top of the page. I refer to this list many times throughout the day, crossing things off the list as I go. If something else comes up that needs to be done, I add it to the bottom of the list. Every evening, I copy the list onto a new page and put the next day's date. This system works like a charm for me, not just for financial tasks, but for all tasks.
5. Memberships/subscriptions you can cancel
J.D. Roth -- It can be difficult to give up things that we might consider "vices." For you, that might be the daily latte. For me, it's always been comic books. (Sad, but true.) These are constant money drains, but they also bring joy to our lives. Instead of giving these things up, I encourage folks to find ways to reduce them, or to save on them.
But to really save money, look for ways to reduce recurring monthly expenses. These are constant drags to your budget, and if you can reduce them, it's a great way to improve your cash flow. Some examples:
- Cancel your cable television and start watching shows online at Hulu.com or similar services. Or, if that's too extreme, cut back from your deluxe digital package to bare minimum basic. I did this and saved over $600 a year.
- Cancel your magazine and newspaper subscriptions. Yes, I know these industries are hurting, but so is your own budget.
- Cancel your gym membership. Find cheap ways to exercise at home, including biking and running and yard work. Bodyweight exercises (like pushups and situps) are free and effective.
- Cancel other monthly memberships. I used to pay $15/month to play an online videogame. Not only was this sucking my time away, but it was costing me $180 a year. I know that's not a lot, but when put together with other expenses, it can add up.
- Cancel your cell phone contract and move to pay-as-you-go. In other countries, prepaid cell contracts are the norm. But for some reason, in the U.S., they're the exception, not the rule. As a result, folks end up paying through the nose, either because they have more service than they need, or because they don't have enough. With a prepaid plan, you only pay for what you need.
What are your savings tips? How do you manage your budget? Please chime in through the comments.
Learn more about this topic from Your Money: The Missing Manual.
Keeping your financial house in order is more important than ever. But how do you deal with expenses, debt, taxes, and retirement without getting overwhelmed? This book points the way. It's filled with the kind of practical guidance and sound insights that makes J.D. Roth's GetRichSlowly.org a critically acclaimed source of personal-finance advice.