How to Save Money: 7 Tips to Start Saving Now
In a world largely dictated by consumerism and materialism, there are many conflicting beliefs around money and its role in
In a world largely dictated by consumerism and materialism, there are many conflicting beliefs around money and its role in happiness. Some say money makes the world go around. Some claim money is the root of all evil. Money, others insist, is the key to happiness. And those people typically aspire to be Richie Rich.
Hate it or love it, there are unavoidable realities when it comes to personal finances, and learning how to start saving money is a skill to add to your self-development toolkit. However, boosting financial wellness isn’t a simple fix, and there’s not one single solution.
Learning how to properly manage your credit card debt, checking account, and other aspects related to personal finance requires a mixture of knowledge — and an understanding of practical ways to save money and spend responsibly — along with a shift in mindset.
Given this, it’s somewhat incredible that we’re not taught more about financial literacy at school, especially given how much money plays a central part in our day-to-day lives. The result is that, for a lot of people, poor habits naturally evolve and accompany them into adulthood.
Money habits are a potential blindspot in self-development. As Morgan Housel, the author of The Psychology of Money, writes: “We think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance).”
Here, we will cover the physics and the psychology behind the issue, offer some money saving tips, and strengthen your financial future by offering ways to better build your bank account. So whether you’re an entrepreneur looking to set a solid foundation for your business, or looking to become more conscious and purposeful with your spending habits, this article is for you.
Why is saving money important?
“The best time to start was yesterday. The next best time is now.”– Unknown
The practice of self-discipline, which is the consideration of long-term results over short-term pleasure, equally applies to finances as it does self-development.
Yes, it can be fun to splash the cash and indulge in retail therapy for the occasional instant fix. But you don’t need to be a financial advisor to know that saving money is crucial for long-term planning and security.
The biggest benefits of saving money are:
Gaining peace of mind
Money troubles can be a constant drain and cause of anxiety. Above all else, having a safety net of funds adds a certain level of security, and in turn, can have a positive effect on stress levels.
In today’s consumer-rich world, it’s tempting to get caught up in the trend of borrowing. In America alone, consumer debt was at $14.56 trillion after the fourth quarter of last year. Shifting mindset to one of saving, not borrowing, can avoid getting stuck in a situation that feels increasingly out of control.
Building an emergency fund
Just 39 percent of Americans have enough savings to cover an unexpected financial emergency of $1,000. Just like grocery shopping and regular monthly payments, financial emergencies are also a part of life. An emergency fund adds to peace of mind by offering reassurance for those times when the unexpected presents itself.
Gaining a sense of control
Taking time to create clarity and structure around your finances is one way to feel more in control. Although there can be a tendency to avoid the “dirty work” or budgeting, checking your credit report, monitoring outgoings, limiting online shopping or setting aside regular savings, in the long-term this will lead to a greater sense of freedom.
Giving yourself more options
A lack of financial discipline is like a tire with a slow puncture. Money seeps out in different areas, a Starbucks coffee here, and electric bill there. By becoming more vigilant in your spending habits and saving money, you become more deliberate in how you invest or spend. Short-term sacrifices then add up to giving yourself room to explore bigger projects, from holidays to investing in yourself.
While it can’t be overlooked that there are societal and economic forces that make financial struggles more likely, there are many factors within your control. Money has no inherent quality. It’s a symbol of value that happens to be the number one bartering tool across the world. But the meaning of money comes from your relationship with it. How would your money habits change if you improve your relationship with money?
Knowing what tools are useful, and improving your financial literacy, is essential. Before that, let’s explore the psychology behind money habits and the benefit of shifting mindset.
The link between money and happiness
“Money may not buy happiness, but I’d rather cry in a Jaguar than on a bus.”— FRANÇOISE SAGAN
Creating a life centered around earning excessive amounts of money isn’t a shortcut to happiness. But at the same time, financial insecurity leads to reduced wellbeing and mental health, an issue amplified throughout the coronavirus pandemic.
So what’s the balance?
In 2010, a well-known study carried out by two Nobel-prize-winning economists, Daniel Kahneman and Angus Deaton of Princeton University discovered that happiness increases with income, up to $75,000 per year. These findings were absorbed into the conventional view of income and happiness.
However, the study has been criticized, along with misinterpretations of the results. A study from earlier this year demonstrated that happiness continued to rise past that marker. Matt Killingsworth, a senior fellow at the University of Pennsylvania, used an app to track subject’s happiness levels at random times. The study looked at experienced well-being, which is how people felt during particular moments of life.
Killingworth notes that it was harder to predict happiness levels in those who didn’t rank money as important. As for personal worth? “There doesn’t seem to be any point where conflating personal success with your financial outcome is a good thing,” he told Vice. “Having more [money] is good, but being fixated on it and using it to define your self-worth is probably not such a great idea.”
In addition, a recent survey by the Financial Times discovered that those earning over $100,000 have the same level of concern over money as those earning under $10,000. What to make of this? Saving money, and increasing financial security, does have an impact on levels of well-being.
The psychology of money habits
“Physics isn’t controversial. It’s guided by laws. Finance is different. It’s guided by people’s behaviors.”— Morgan Housel
Our thoughts and emotions play a significant role in each and every decision — and that includes money habits. As a result, there’s an interesting link between emotional intelligence and financial wellness. Financial psychologist Dr. Tracy Thomas is an expert on the interplay between emotions and spending. She breaks down money habits into two categories: reactionary spending and intentional spending.
Thomas explains how a reactionary mindset responds to the immediate environment, catering to immediate wants and needs. Intentional spending, on the other hand, takes into consideration what investments would have a positive influence on our future selves. Spending is less impulsive.
That doesn’t mean there’s no room for emotion — quite the opposite. “Your savings goals are really your outcomes for your life. It’s about creating something you really want,” Thomas told Cheddar News. This points to the overlap between goal setting and finances, too. Whilst some goals can be money-related, such as clearing debt, many life goals require a financial element to be achievable.
Dr. Brad Klontz, a financial planner and psychologist, found that savings rates could be boosted by up to 73 percent when people established an emotional connection to a savings goal. “If you can get clear about why you want to save, why it matters, who you’re saving for and execute while you’re excited about it, it can have dramatic effects,” Klontz told CNBC.
In addition to emotions, our thinking patterns influence spending habits, too. Beliefs about money, such as I’ll never learn how to save money or even that to make money, you have to make extreme sacrifices or dedicate your life to work. You might even believe wealthy people are immoral, or wanting money is wrong.
How the six financial personality types spend money
I used to feel anxious about money. When I was struggling financially, my general go-to was avoidance.
Financial avoidance (or financial denial) is well-known. According to the American Psychological Association, “people commonly deal with anxiety by avoiding whatever it is that makes them anxious. Unfortunately, if you avoid dealing with your finances, you’ll likely create more financial problems, and more anxiety, in the long term.”
This is just one quirk in the overlap of psychology and spending habits. The Financial Times have built upon this, with the input of leading psychologists, to highlight six financial personality types. Whilst these aren’t set in stone, they act as archetypes that can provide understanding towards your approach to money. They are:
- The anxious investor
These people tend to trade frequently in high-risk transactions. These people, who are often “hobby traders,” can become addicted to the environment of trading, and, at the same time, overestimate their ability and skill.
- The hoarder
The opposite of the above, hoarders struggle to part with money, either through investing or spending. Risk is avoided through anxiety, and people in this category tend to come from a background where finances were a struggle.
- The social value spender
These people buy things to boost self-esteem, from a little retail therapy to gifts for friends or family. Considering the nature of society, it’s natural to experience this from time to time. But this becomes a problem when people confuse material things with love or self-worth.
- The cash splasher
These people spend money so others can see it, such as picking up the tab at a bar — and letting everyone know about it. Although quietly paying for someone else is a wonderful act of giving, the core motivation in cash splashers is to be admired for their generosity.
- The Fitbit financier
The calorie counter of finance, the Fitbit Financier obsessively checks their spending habits, and can never fully relax. The psychologists interviewed note that these behaviors tend to stem from feeling outside of control in other areas of life.
- The ostrich
Linked to my above example, the ostrich is someone who buries their head in the sand, avoiding the reality of their financial situation. Behaviors stemming from this include avoiding checking bank balances or paying bills.
Do any of these personality types stand out for you? It’s likely you might note tendencies that cover multiple types. But take a moment to reflect on which of these feels true to you. This allows you to start taking an honest reflection on your financial outlook, and in turn, highlights the potential stumbling blocks when exploring how to save money.
7 practical tips on how to save money
Now we’ve explored the foundation of financial wellness, it’s time to put together a plan. The below 7 tips are a mixture of physics and psychology of money, offering both practical tools and shifts in mindset.
Keep in mind this is a lifetime process, and certain habits will take time to change. But introducing these tips will boost your emotional and financial wealth:
1. Explore your money story
The reason this article places so much focus on psychology is because, ultimately, most people know what they need to do to save money. Yes, there are ways of saving skilfully. But the common barriers are related to beliefs and emotions, as we’ve explored above, often shaped during our upbringing.
For example, people raised in households that are secretive about money tend to have compulsive money habits, such as hoarding. Bari Tessler, the author of The Art of Money, refers to this as a money story:
“Simply put, your ‘Money Story’ is the entirety of your relationship with money. The pain, the joy, and the learning. It is as unique as you are. It includes all of the historical facts of your financial life. The emotional wounds and triumphs. The tough conversations. The beliefs and habits inherited from your parents and lineage, the ways you adopted them, and the ways you rebelled against or even transcended them. It includes your strengths and challenges with money, arising from your unique circumstances, wiring, and personality type. It includes all of the sensations and emotions and bodily reactions that money stirs within you.”
Tesla offers journal prompts to explore your story. What was your first memory of money? What beliefs do you hold? Can you forgive difficult circumstances or relationships that contributed to poor money habits? Unearthing your money story is illuminating. You’ll be surprised at what comes to the surface!
2. Be mindful of your reactive emotions
Knowing your story is one thing. But that’s just one step. In moments when faced with an impulse to spend or a long-standing habit to avoid checking your bank balance, mindfulness is necessary to break the loop. Whenever making a financial decision, take a few moments to pause. Ask yourself: am I being reactive or intentional with this decision?
Understanding how the role emotions play in decision-making, take time to explore how you’re feeling in these moments. Are you feeling anxious? Excited? Are you looking to buy something to change your mood in moments of sadness?
3. Explore spending triggers
Spending triggers cause recklessness with money. These triggers can be certain emotions (such as boredom), situations, or people. These “triggers” tempt you to spend money against your better judgment. If you’re a social value spender, your relationships could be the biggest trigger of your spending. Situations might be going out with coworkers for expensive lunches, or “browsing” expensive retail stores.
Take time to reflect on the triggers that lead to reckless spending. Again, awareness is a great starting point, as it allows you to avoid these triggers or situations, or at least to be more vigilant when you’re in a situation where you know you might be prone to make unhealthy financial choices.
4. Save money by spending less
This leads away from the psyche into the practical aspect of how to save money. The first step is to get an overview of your spending habits — your income and expenditure. This might take a bit of time in the beginning, but once you’re in the routine, won’t take too much effort. You might choose to do this the old-school way, using a spreadsheet, or use an app that helps you budget.
Either way, the initial step is to take an honest look at how much you earn, and where your money goes. This then allows you to notice trends in your spending that can be changed. For example, you might notice you’re spending excess amounts of clothes, or takeaways. By cutting back in certain areas, you’ll have more disposable income to save.
5. Pay off debt before you save
Putting aside money to earn interest is futile if you have high-interest debt elsewhere. If you have $1,000 debt on a credit card where you’re paying interest of 18 percent or more per year, you’ll be paying at least $180 with no change in your debt level. If you save $1,000 in an account with a 1 percent interest rate, you’ll earn $10. That means you’re $170 better off if you pay off your debts first!
“When you save money you’re actually lending your cash to the bank for it to lend on to other people,” Martin Lewis, of MoneySavingExpert, writes. “The difference between the rate at which it borrows money from you (the savings rate) and the rate it charges others (the borrowing rate) is its profit. Therefore, on the whole, it’ll always cost more to borrow than you can earn by saving.”
6. Set up a budget
In All Your Worth: The Ultimate Lifetime Money Plan, Senator Elizabeth Warren popularized the 50/30/20 money rule. It can be tempting to over-complicate the practicalities of how to save money, but this rule is a simple way to start building a financial safety net.
This is related to the percentage of after-tax income, broken down into:
- 50 percent on needs: Ideally, your essentials, from rent payments to healthcare to student loans, don’t surpass half of your income. Living in big cities or earning a lower salary can make this target difficult, but the principle remains the same. These are obligations you have to pay to survive. Clearly, if this takes up too much of your salary, it’ll make saving much more difficult.
- 30 percent on wants: These are extras, or treats, from anything to new clothes to dining out to paying for streaming services or a gym membership. If you’re working hard to earn money, you want to be able to enjoy it. By setting aside a third of your income for things you enjoy, you can indulge reasonably, whilst still having room to save.
- 20 percent towards savings: All of these funds go towards a savings account and investments with your long-term financial goals in mind.
These percentages make it easier to put concrete amounts into your budget. Let’s say your income is $2,000 per month after tax. Your needs would equal around $1,000, leaving $600 for your wants and $400 towards your savings.
This structure then gives you a clear idea of how to break this down further. For example, you might break down the $600 into categories, such as:
- $200 entertainment
- $100 clothing
- $200 socializing
- $100 eating out
This is personal to you. But the main way to learn how to save money is to set aside a percentage of your income and to protect it. Having a set amount for your wants also means it’s less likely you’ll chip away at your savings.
7. Visualise your savings goals
Last but not least, it’s time to build enthusiasm and to harness the knowledge of the role emotions have in saving money. While there may be short-term sacrifices that have to be made, they’ll be easier to tolerate if you have a clear vision about what you’re saving for, and why.
There are two elements to this practice. The first is to set realistic, tangible goals. For example, “I want to save $2,000 for a luxurious holiday”, or” $10,000 to start further study.” The second step is to bring this goal to life and get excited about it. Where do you go on holiday?
Picture yourself on location. Imagine the sights, smells, sounds. Imagine the sense of satisfaction you’ll get from knowing you put in the effort to save for the experience.
Before you go
Money is still a topic that comes with a stigma. Talking openly about it isn’t easy. Avoidance can be the go-to response when things feel out of control. But money is essential, and learning how to save money and get your finances under control is a crucial skill that’ll pay off in many ways.
Money management is without a doubt a crucial area of self-development and mental health. Hopefully, having read this article, you’re feeling more optimistic about your ability to influence your finances. You feel equipped with understanding around the role of emotions and thoughts, and you’re ready to overcome unhelpful habits to start boosting your financial wellness.