Saving is the cornerstone of growing your wealth. Saving money, like going to the gym or eating healthy, is a habit, that over time will accelerate you towards financial freedom. An effective saving strategy can be distilled down to three core principles: Being intentional, consistent, and diligent. The following will break down each of these principles and give you more concrete ways to create a saving strategy that works for you!
Be intentional when saving
“Intention is one with cause and effect. Intention determines outcome. And if you’re stuck and not moving forward, you have to check the thought and the action that created the circumstance.”
The first and most important principle for saving is to be intentional. As with most things in life, doing something with intention will lead to a more desirable outcome. Taking blind action will lead to burnout and will leave you overwhelmed and unsuccessful. I would love nothing more than to have all my clients reach their journey to financial freedom on purpose, not by accident. In order to be intentional, start with a goal, then visualize your strategy, and sock money away before you spend it.
Create a savings target
Creating a target is the first step in a savings plan. This could be saving for a new car, down payment on house, or retirement. Striving for a goal will motivate you and keep you accountable. Creating SMART goals is a great framework for reaching goals. SMART stands for Specific, Measurable, Achievable, Relevant, and Time-bound. An example of a SMART goal may be the following:
“In order give myself more financial confidence, I will build an emergency fund equaling $5,000, or three months of living expenses, by June 15th.”
This goal is specific (create emergency fund), measurable ($5,000), achievable (not too large or too soon), relevant (provides more financial confidence), and time-bound (a specific date). Using this intuitive approach, you can take your first step in achieving your financial goals.
Visualize your savings strategy
Just writing down a goal is not enough; taking the steps to visualize your savings strategy can propel you toward success. Studies show that taking the steps to see how your money is being allocated, and the impact of saving over time, can help create and sustain motivation. Nearly all the great athletes have one thing in common: They can visualize greatness. Michael Phelps, Lindsay Vonn, Wayne Gretzky, and Tiger Woods have all used visualization to compete and succeed at the highest level. Using a visualization strategy for savings can increase the likelihood of success. There are two ways you can do this; First, create a vision board with pictures that represent your goals. If you aspire to own a chalet on the ski slopes of Vail, then find a picture that fits your dream home that can reignite your passion when you need a little pick-me-up. Second, use financial planning tools to visualize your strategy. The financial planning tools can walk you through a systematic approach to saving. These tools can give you clarity on the exact steps you will need to take to reach your goals.
Save before you spend
Saving with intention requires you to save first, spend second. Before buying that new mountain bike or skis you have always wanted, contribute to your 401k! The larger than life investor and billionaire Warren Buffet suggest, “Don’t save what is left after spending; spend what is left after saving.”
Be consistent when saving
“We are what we repeatedly do. Excellence is not an act, but a habit.”
The second principle of saving is to be consistent. Consistency creates habits, and good habits will create good outcomes. Saving is one of those positive habits that you will never regret. Sometimes the hardest thing about achieving a goal, be it losing 20 pounds, running a marathon, or hiking your first 14er, is take that first step. By taking your first step you prove to yourself you can do it, then you take a second step, and a third, and suddenly you have saved thousands of dollars. You may be shocked but if you follow these steps you can put yourself on the right path to financial freedom!
Start small, increase contributions over time
How do you eat an elephant? One bite at a time. When it comes to being consistent, I am a big believer in starting small and increasing over time. An effective savings strategy should not shock your financial system. If one of your financial goals is to retire, then you will likely need to save a million dollars or more to live comfortably in retirement. This can be an overwhelming amount of money. If you are just getting started, then I suggest starting with saving just 3% of your income and increase your saving by 1% each year. So, in year two go from saving 3% to 4%, year three 4% to 5%, and so on. After eight years you will be saving 10% of your income toward retirement. This is one strategy to get started saving for retirement.
Use periodic contributions
Another way to be consistent is to use periodic contributions. This could be bi-weekly or monthly additions to your savings goal, instead of one-time payments. As an example, if you are considering adding money to an IRA or Roth IRA to save for retirement then your maximum annual contribution limit is $6,000, or if you are over 50 it is $7,000. Instead of waiting until the last minute to make a lump sum IRA contribution at the direction of your tax advisor, you should consider saving on a monthly basis. Broken down over 12 months, your monthly savings to your IRA would be $500. That is often easier to stomach than a large lump sum contribution of $6,000. A systematic approach, like monthly contributions to an IRA, can make saving feel less challenging.
Be diligent when saving
“What we ever hope to do with ease, we must first learn to do with diligence.”
To be diligent in your effort to save is to persevere and be attentive to your actions. Knowing how you are saving can be just as important as the saving itself. I once made the mistake of not saving diligently. At 25 I started a 401k and I was putting away 10% of my income. Although my account balance was steadily increasing, I quickly realized my savings was locked away until I was 59.5 years old. Ouch! Without the ability to save much more I decided to reduce my 401k contribution to 5% and shift the additional money to a cash savings account to build up my emergency fund. Below are a few things to consider in order to be diligent about your savings strategy.
Save to the Best Account
A diligent savings strategy is using the best savings account. The type of account you save to depends greatly upon what your goal is. Things to consider when picking the best account are the tax benefits, accessibility, and investment options. If you are saving for retirement, then an IRA, Roth IRA, or employer-sponsored plan with tax benefits may be the best option. If your goal is to build an emergency fund, then you will want to save in a highly accessible account with little or no risk. Make sure there are not large penalties for taking money out when you need it. If it’s saving for college, then a 529 plan might make the most sense. (Read this article for more on college saving). Finally, consider your investment options. If you’re looking for more risk and return, then only having access to the certificate of deposit or CDs, is not the right savings account for you.
Make it Automatic
If you are anything like me then going to the bank, writing a check and putting it in the mail, or remembering to do an online transaction every month is annoying and cumbersome. Make your savings strategy as easy as possible by setting up automatic transfers to the necessary savings account. If you contribute to an employer-sponsored retirement account, like a 401k, then you can have the contribution come directly out of your paycheck. If you are saving to a different account, then work with your financial institution to set up an automatic withdrawal. It makes saving feel effortless. Pro tip: people often tell me it feels painful to see money leave their checking account each month. In order to offset the psychological pain, I suggest looking at the account the money is going to the day after it leaves the account. This will make it feel less like an expense and more like a gain!
Live Within Your Means
The final part of being diligent is to live within your means. It can be tempting to simply live for today, but I have seen people with little planning for tomorrow regret not saving more. I challenge you to look at your personal cash flow, meaning to check what money’s coming and what’s going out. If the amount of money going out of your bank account is greater than the amount going into your bank account, then you’re going to have problems. This often results in high credit card balances and bad debt. If this is you, then identify where you can cut expenses and get your cashflow into balance. Just recently I worked with a client to help them identify unnecessary expenses. Initially, they thought they spent $500 per month on eating out, only to realize they spent over $1,000 each month at restaurants. Sometimes it’s difficult to keep track and quantify all the purchases we make each month. Do your best to live within your means and save as much as you can.
Although saving can seem simple, implementing an effective saving strategy can be challenging. By being intentional, consistent, and diligent with your savings you can put yourself on the path to financial freedom. If you have questions or need additional guidance you should contact your financial professional or send me a message for a free consultation.