Wednesday, March 2, 2011

On Building Savings

Photo Courtesy of Shinya Omachi via Flickr

I have always associated building savings with a high level of discipline. It's on account of such associations that I have had immense difficulty saving money. In recent months however, I've strongly reconsidered my stance. What led me to do so? Well, I decided it was time to change my perspective after watching my paychecks be spent in their entirety every week while the amount of fun I had, goods I acquired, and debt I carried seemed to stay at relatively the same level. Taking note of this cause me to ask myself "What in the world have I been spending all of my money on"? This question become more troubling as I added up the amount of funds I've received from scholarships, financial aid, student loans, tax returns and selling goods on eBay. At once I became conscious of the fact that though I've received thousands of dollars in the past year, I didn't save any of it. Not even one dollar.

The frugal experts are probably saying "You have no money in your savings account and you think you can offer insights on frugal living? Are you out of your mind?". Well my friend, the answer is "yes" to the first question and "I don't think so" to the second. While it is true that a frugal expert may know more about building savings, it does not necessarily follow that such an expert is the best person to teach a novice about the subject. From the first post, I admitted that much of what I write pertains to learning how to be frugal and taking initial steps in that direction. I never claimed to be a frugal guru ready on demand to recite current interest rates for various savings accounts. Furthermore, I believe that the average article on savings is too busy preaching to the choir to reach the astounding number of people who have trouble building savings. Sometimes you gotta get back to the basics and address what keeps people from saving before suggesting methods that they aren't yet ready to use.

That being said, I will lay out my plan to build savings. I consider it a simple plan and intend to keep it that way while I master the fundamentals of building savings. My first strategy I have in mind involves thinking small. I make around two hundred dollars a week and will start by putting just five dollars of that weekly income into a savings account. This will be done immediately upon receiving my paycheck to avoid making such a deposit seem larger. I will do this right away because it is much easier to set aside five dollars out of two hundred dollars than five dollars out of twenty dollars. In the former, you barely notice the difference, in the latter you give up a fourth of your remaining income and feel a stronger sense of deprivation. I will continue to make five dollar deposits to my savings on pay day and see how the weeks play out. My theory is that they will certainly play out the same as previous weeks. This is a likely outcome as five dollars is much too small of change in income to cause any inconvenience. The goal is to get to the point where I no longer see the five dollars as a portion of my income and putting it aside becomes so habitual that it's as natural depositing the rest of my money into my checking account. So unlike the previous weeks, I would be saving something every time I'm paid.

If this idea sounds familiar, it's because it probably is. There are similarly structured methods floating around the personal finance world regarding building savings. I remember reading The Automatic Millionaire a couple of years ago and being especially impressed by the whole "automatic" side of David Bach's ideas. The book proposed a method of saving for retirement in which a prearranged amount is automatically deducted from your paycheck and placed into savings. This way there is no sense of deprivation attached to building savings as the money is automatically put away for you and you quickly become accustomed to living without it.

In the method I am trying out, I don't want my process of saving to be completely automated as I would like to improve upon my habits while I'm saving money. In my opinion, the physical act of depositing the money versus having it automatically deducted will give me a sense of control and satisfaction I wouldn't get through the automated method. Many of those who have funds automatically deducted from their paychecks have these funds deposited into retirement accounts. The driving purpose being to build a large amount of money you can live off of once you are no longer working. Such savings seem incredibly far-fetched and uninteresting to a young man like myself and would definitely make me feel like I'm depriving myself now for some future gain. According to my present plan, I am saving without a clear purpose in mind. No you didn't misread that, I said I am saving without a clear purpose in mind.

Well I'm a part of this aimless, purposeless generation of young people aren't I?

Jokes aside, by no purpose, I simply mean without a set finishing line or enticing reward. I'm not building savings for retirement, or to purchase something expensive or anything concrete like that. I am saving money because I'm tired of blowing through money unconsciously and having little to show for it. I suppose I was wrong in saying I had no purpose. The purpose, would be to put my method of saving into practice without consideration of the end result. This time next year, if I realize that I'm still spending my paychecks in their entirety, I want to pull up my savings account balance on the computer and see I have $260.00 in there. I don't want to spend every week leading up to that point envisioning such an outcome. I would rather have saving money built so deeply into my routine that only upon remembering how wasteful I used to be would I notice the big difference.

Once I have that down, then I'll start looking at what I can do with the money I've saved. As cliche goes, you gotta learn to crawl before you can walk.

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