It is an intentional act
Saving and investing money does not just happen. We can stumble into debt, but we cannot stumble into a sizable investment portfolio. This may be because as a nation, we lean more towards materialism than saving for the future, creating a larger population of spenders than savers. Whatever the reason, saving and investing money is an intentional act that needs to be planned and executed. This includes having a savings goal in mind, creating a realistic spending and changing spending behaviour over time to constantly work towards saving money.
It is not sexy
Spending money is relatable, its sexy and for much of what we purchase, people can see what we spend money on. Saving and investing on the other hand is not very sexy. The topic itself can elicit frustration, boredom and anger for some people because we would rather do anything else with our money than save it.
What saving money does do is provide us with peace of mind. Something that is no extrinsically visible to the world, but is intrinsically important to our health and well being. During good financial times and a strong economy, saving money can seem irrelevant or even unnecessary. Due to the recency bias that we all encounter from time to time, we believe that what happened yesterday will also happen today and tomorrow. We will not be let go from our jobs, we will not encounter a health issue that may make us unable to work for a time etc. On the contrary, we should try to save during the years of abundance in preparation for lean financial times. It is a lot harder to save on a reduced income than if incomes are favourably higher.
It is behind the scenes
Unlike the purchase of material goods, people can’t see the efforts made when saving money. It is easy to make conclusions about someone’s wealth if they have a big house, fancy car, expensive clothes or home décor etc. However, physical possessions do not equate to wealth and it is hard to determine if the purchases are financed by debt or not. Even if people knew what our net worth is (as many bloggers and people in the finance world share this information) we probably would not get the same reaction than if we showed them with the things we can buy. This may be due to materialism being so prevalent in our society or simply because tangible items are easier to equate to wealth than abstract numbers like our stock portfolio. Whatever the reason, saving and investing money is a ‘behind the scenes’ operation with little recognition and amazement from those around you.
It is a habit that can be formed
I don’t think people are born either as savers or spenders. I think our personalities and behaviours are formed through our upbringing and personal traits and over time, we tend to gravitate towards spending more or saving more. However, these are habits that are formed and can be reformed. With continued discipline and a plan in place, habits can be changed over time until the action becomes second nature. Saving and investing money is no different. We can also make this habit easier by automating our savings so we don’t get tempted to spend what we know should be saved.
Categorizing yourself as a saver or a spender and being rigid with your classification can be harmful to your ability to make changes to your spending and saving habits. Be open to developing new habits by not classifying yourself to a fault. Instead, be a person that is intentional with their money and how they choose to save and spend it.
Saving (Money) is Just a Means to an End
Money (fiat money) in its self has no value. Society gives it value by attributing it to what it gets you. If people did not believe in the monetary (fiat) system, then money would not be worth anything. The act of saving and investing should also be a means to an end, not the end itself. Saving money for the sake of saving makes for a long and fruitless journey. Instead, be intentional about why you save and what you are saving for. Since money is a means to an end, it is important to clearly define what that “end” looks like to you. The more vivid and clear your end, the more likely saving and investing money will be something you want to do, rather than something you must do.
Things will change, roll with it
You may have a clear laid out plan for your financial future and are systematically working towards achieving these goals, even with the best of intentions, things may not go as planned. Governments may change tax laws, new political parties will come in office and the systems that we may be used to can change, affecting our savings.
These are changes we cannot control as individuals (although reform can be made as a collective through votes) and should not waste much of our efforts dwelling on them. If the government decides to increase taxes or your employer reduces the percentage they match towards your 401k (RRSP) contributions, focus on the things you can change (effective tax planning, changing employers etc.) and do not give much thought to what you cannot change (unfavourable tax laws).
Don’t rely on anyone else to save for your future
Many people put off saving and investing for retirement until it is too late, or defer this responsibility to someone else. Instead, we should start saving early and often and take control of our own financial future. For example, relying on the government, or government benefits to fund your retirement is not ideal. First, government benefits were put in place to supplement, not replace retirement income. For a majority of Americans, government benefits would not be enough to live a comfortable retirement. Second, policies and government benefits change. The benefits that are enjoyed today may not be there tomorrow. They may be worse, they may be better, but they will more than likely be different.
It is also important not to rely entirely on employers for your retirement. Rarely now do people enjoy the retirement savings security they enjoyed in the past from their employers. In fact, there are less than 20% of employers that still offer a defined benefits plan and much of these pensions are with government employees, teachers etc. Instead, most us are in group retirement plans, defined contribution plans, company stocks, profit sharing or a combination of these. Whatever we are invested in, it is important that we diversify our investments and what retirement vehicles we use to save money.
Knowing is not saving
Most of us know the importance of saving money, but not all of us do it. Knowing we must save, triggers a thought without any implementation or change in behavior. In contrast, saving requires a thought which translates into implementation and a behavioral change is formed either immediately or over time.
A good way to translate saving from a thought to an action is to set a big enough “why” for your savings goal. The goal should be specific and personalized to you to be effective. Saying you want to save and invest to join the millionaire dollars club is nice, but is not personal or specific enough to be attached to something that is specific to you and your dreams.
Wealthy people save money
Wealthy people spend strategically and save relentlessly. They splurge on a few things and invest the rest. They avoid high cost debt that eats away at their wealth and almost always live well below their means.
We should not confuse being wealthy with being rich. Typically, wealth can be passed on to future generations, it is sustainable. This is because of sounds investments made in the past and based on net worth and not income. Being rich however can be gained and lost in one generation. Yet, sustainable only if the person is working and based on income. Much of what we see on television with celebrities. It is their extravagant lifestyles is paid for by someone else or financed with debt. Most wealthy people avoid excessive extravagance. They do not feel the need to display their wealth for others to affirm their fortune. Wealthy people can be extravagant when they want to be, but don’t always feel the need to be.
You can’t save what you don’t have
Saving money means living below your means and living on less than you make. If you spend everything that you make, there will be nothing left to save. By placing your savings goal towards the end of your budget, you will never have the money to save. Saving needs to come first, because you are important enough to put yourself first. That is not to say that those items should not be addressed. Only that we tend to do what is priority most of the time. And what is not a priority almost never. There is usually not enough money to fit all our needs and wants so placing a savings goal. So the bottom of your budget ensures it does not get reached. Instead of looking at it as you can’t afford to save, it is time to look at it as you can’t afford not to. Your financial future depends on it.