Monday, February 9, 2009

Concentrate On Saving, Not On How Much You Save

Tip #66 – Concentrate On Your Savings, Not On How Much You Save. Huh? Concentrate on your savings – or how much money you put away – rather than on how much you save on your purchases. The most important step to financial independence is having money saved or put away. How much you save on that pair of jeans is inconsequential. How much you save on your electric bill doesn’t matter. And how much you save on your trip to the beach isn’t that important. None of that counts if all of the money you save is being spent. The only way you will have financial independence is if you put money away.

Buying clothes at thrift stores for cheap may allow you to eat out once a week at a restaurant. Keeping the heat down to 55 degrees at night may free up some money for your daughter’s piano lessons. And saving money on a hotel during your beach vacation may allow you to put more money towards a new kitchen table. But if all of the money you save and all of the frugal things you do is freeing up money for other purchases and activities, then the only thing you will have to show for all of your savings is more things and more activities.

Now I am not saying you should not save money. You absolutely should. And I’m not saying that more experiences are bad or more things are necessarily wrong. All I’m saying is that until you take how much money you save and put it away in a bank or somewhere similar, you are still using up all of your money. And you will not attain financial freedom with these habits.

What can you do about it? Let’s suppose you have no money in savings at all. And let's assume that all of your current expenses are $2000 a month. You figure out a way to cut your grocery bill down by $100 per month. Then you need to put that $100 towards savings. Don’t put that $100 towards weekly karate lessons for your son. At this point, having money in the bank is a priority over your son learning karate. If you can cut your vacation expenses back by $300 this year, then put that $300 in the bank. Don’t use it to buy a desk for your office. The table you have in that room works just fine. And if you can live with the heat set 2 degrees lower than usual, you should put the money you save on the electric bill in the bank, not for new jeans and shirts. Unless the items or experiences you purchase are necessities – such as food to live on, clothes to wear because you don’t have any others, or activities the doctor recommends for the well-being of your child – then putting money away in the bank is more important.

Once you have savings built up – for emergencies, for your future retirement, and for future necessary expenses, such as a car, braces, or college, then you can start adding back extras into your everyday living – a new piece of furniture, dinners out, and dance lessons. Until that time, the important point to remember is to focus more on saving, rather than how much you save.

In Real Life (IRL) – I like getting a bargain as much as the next person. I love using a coupon on top of a sale for an item I normally buy at the grocery store, buying a present for my daughter’s birthday at a yard sale, and finding a toaster oven that I needed at a thrift store. But to me saving money on each of these things is a means to the end, not the end itself. I try to save money on groceries, clothing, gifts, electricity, vacations, etc. so I can put money away each month. That is the goal I am trying to work toward. I save money so I can put money away. Putting money away is the end I am working toward.

You know what is even more fun than saving money on things? Watching your savings grow in your bank account! When I was a kid I had a passbook account and I liked watching my savings grow. I would put part of my allowances and my birthday money in my bank account each month. And when I was in high school I would put money from my summer jobs in there, too. I knew I could take the money out at any time and do with it what I wanted. I dreamed of taking a trip to Europe with the money. By the time I graduated high school I had over $1,000 in that account. When I was in college, I did a winter semester abroad using some of that money I had saved.

When I got my first job after graduation, I started putting away money from each paycheck. And I would enter my savings into a Lotus spreadsheet (does anyone else remember Lotus?). I then transferred my entries over to an Excel spreadsheet. I would keep track of how much I had, what my earnings rate was (or what I hoped it would be), and how much I would have when I was 30, 40, and 60 years old. I was saving for a house and retirement.

When I got married, we bought a house with the $70,000 I had saved during the previous 10 years. My husband and I continue to put money away for retirement and other things we want and need for our family - college for our children, emergencies, a car, braces, vacations, etc. We do it by saving money – buying in bulk, cooking from scratch, using coupons at the grocery store, shopping at thrift stores, living in a modest house, and buying only what we need. We then use all the money we are saving and put it away for the future.


Traci said...

I have been reading you blog for a few months and I must say that I think this is your best post yet. I have always been a bargain hunter but it wasn't until 3 years ago that I realized that all my bargain hunting wasn't producing much financial gain for myself and that is when I really started to "pay myself" first instead of justifying other purchases with the fact that I had saved "x amount" on groceries that week and now I could treat myself out to dinner or buy the kids a new toy. Well my formula has worked and the key to saving is live below your means and pay yourself first. It is really a no brainer but the first step is sticking to your guns and adjusting your lifestyle. I have learned a lot from reading fugal blogs but the big picture is not just grocery/drug store savings, it is learning how to spend wisely. I think your blog has something special because it is practical, straight forward and honest. You should consider writing a book. I would read it.
Thank you, Traci

Michele said...


Thank you so much for your very nice comments! I am glad you like the blog. I am enjoyng writing it. I sometimes think we all get caught up in the great deal, but then don't necessarily follow-through and put away the extra that we saved. Thanks for commenting!

San Francisco Financial Planners said...

Brilliant saving ideas. I always like to show my clients how small savings can add up to big money over time:

Save $1 per day = $30 per month = $365 per year

Save $50 week = $200 per month = $2,400 per year