Many people in the personal finance community categorize individuals into spenders or savers. This simplifies our understanding, but also mistakenly places people into two extremes. Whether your savings rate is 5% or 50%, smart savers have certain characteristics they all share. In this article we will discuss what these are.
Life is about trade offs when making purchases
Smart savers understand they have a limited amount of money. This money needs to pay for life’s needs and wants and provide savings for the future. Each saver has a minimum desired savings rate they would like to achieve on a regular basis. With this in mind, savers are good at making trade-offs by foregoing spending on certain items so they can indulge on others while still maintaining their savings rate. For example, as a saver I think it is important to maintain a healthy savings rate each month. However, I also enjoy spending money on eating out, going to the movies and entertainment. Since these items tend to be of high priority for me, I am comfortable with spending more on these expenses and less on other items like clothing. Whether smart savers actively track their savings rate or are subconsciously aware of it, they are always making trade-offs that keeps them in equilibrium with their personal savings rate.
Every little bit counts
Whether your saving more than half of your take home pay to reach financial freedom at an early age or slowly stocking away a few dollars each month, smart savers understand that every little bit counts. Even in lean financial times, savers will try their best to set aside some money for the future. A rainy day or for retirement, they find it important to save for tomorrow.
Smart savers understand their money needs to grow
Smart savers understand their money needs to work as hard as they do. They know that the returns offered by certificate deposits (CDs) or market linked products are not enough for them to sustain their lifestyle during retirement because they do not cover the cost of inflation. They take the time to understand how to invest in the stock market and employ the help of professionals when needed. Although they seek the advice and guidance of finance professionals, they do their homework to ensure they understand what they are invested in and that it is in line with their risk tolerance.
Smart savers have better control over impulse shopping
Many smart savers love to spend money, but their spending is intentional and in line with their budget. They are less likely to impulse buy, not because they are not tempted to spend money. Rather, they regularly implement techniques that will minimize the occurrence of impulse purchases. These include:
The 72-hour rule
1. Smart savers wait 3 days before making an unplanned or expensive purchase. If they still want to purchase the item after 3 days, they know they will be less likely to regret their decision and have buyer’s remorse.
Avoid shopping based on mood
2. Smart savers know that emotions play a large part when it comes to making impulse purchases. They avoid malls and stores when they feel high levels of good or bad emotions. Instead they find other ways to distract them that will not comprise their bank account.
3. Smart savers make good accountability partners because they enjoy the idea of saving money and can encourage others to do the same. They also find accountability to be a benefit as it serves as an added safe guard from overspending.
Spending decisions not dictated by social standards
Smart savers know that it is not what you have that determines wealth and financial freedom, but what you have left. Even if they want to be accepted by society (I am mean who wouldn’t), they rarely allow other people’s standard of living dictate their own. They avoid comparing themselves to their neighbors. Instead, they align their spending based on their values, not the values of society. Although being seen as “different” by others may make them uncomfortable at times, they never lose focus on what is important to them. This guides how they choose to live.
Frugal not cheap
Smart savers place value over price. They understand that trying to spend the least amount of money possible may actually cost them more money in the long run. However, they actively search for deals and discounts when possible and have no problem spending a premium on items that hold great intrinsic value to them. Their frugality comes from their understanding that money is a limited resource and their desire to reach their financial goals. They understand the phrase, ‘you can have almost everything you want out of life but just not at the same time’. As a result of this, they are disciplined and diligent in reaching their financial goals and try to avoid buying something today with tomorrow’s income (debt).
Use compound interest in their favor
Smart savers know there are three factors that affect the size of one’s financial nest egg: amount of contributions, rate of return and time. They understand that the first two factors, contributions and rate of return may not be in their control. They may fall in hard financial times and have less money to contribute (if any at all) and even with the most thoroughly done research, no one can predict the rate of return on investments over a short period of time. However, smart savers know that time is the one factor that they can control when saving money. They start saving money at a young age. They save early and often and let the ‘magic’ of time and compound interest do the rest.
Latest posts by Pamela (see all)
- 6 Ways Google Flights Can Save You Time and Money on Travel - February 11, 2017
- 5 Steps to a Perfect Valentine’s Day - January 25, 2017
- How to Save Money on Valentine’s Day - January 16, 2017