I was recently talking to a buddy of mine about personal finance when we ended up on the topic of saving money. He knew he needed to save more money, but was having trouble actually doing it. To him, saving money came down to self-control. As he explained it, he was struggling to save more because he couldn’t resist the urge to spend. If he could just avoid buying the latest gadgets or going out to eat so often, he’d definitely be able to put more money away – or so he told himself. Saving money came down to willpower. If he wanted to save more, he needed to will himself to do it.
I’ve always seen it a little differently. I’m admittedly a terrible budgeter. I don’t give every dollar a job and while I track my account balances regularly using both Mint and Personal Capital, I rarely, if ever, actually sit down and review my spending. I’m also horrible at self-control. I go out to eat all the time. And if I see something that I want that isn’t too expensive, I’ll just buy it without much thought.
Despite what appears to be a total lack of budgeting, my savings continues to grow by leaps and bounds each month. Last year, I saved over $33,000, which is more astounding when you consider that I took a $50,000 pay cut in the middle of the year.
My ability to save doesn’t have to do with willpower or self-control. Instead, it’s all about the systems I have in place to make my pool of money look as small as possible. You don’t need to exercise self-control because a computer can do all of the saving for you.
Think Of Money In Terms Of Portion Sizes
I’ve always thought that saving money is a lot like eating food. When it comes to food, most of us will pretty much eat whatever is put in front of us. Give your average person a huge plate of food and they’ll probably need to eat all of it before they feel full. Put a smaller plate in front of that same person and they’ll probably start feeling full once they’ve finished that smaller plate. It’s a weird psychological thing that our brains can’t seem to avoid. (Source: The Journal of the Association for Consumer Research).
Money works in pretty much the same way – we just sort of make do with whatever is put in front of us. If you give me $2,000 per month to spend, I’ll probably figure out a way to spend about that much every month. Cut that down in half and I can probably figure out a way to work with that too. Your brain will just sort of trick you into working with what you have.
If you think this isn’t true, just go back in time and look at what you did when you were a student. You probably didn’t have all that much money back then. Things that are necessities now – the big house, the luxury apartment, the car, the nice food – just didn’t seem all that necessary back then. Your portion size was just smaller, out of necessity obviously, rather than choice.
You can save more if you can just control this portion size. It has nothing to do with self-control. You just need to make your portions smaller.
Automate Your Savings
The secret to saving is setting up an automated system to get that money out of your hands as fast as possible. We all start out with what I think is a pretty big plate – our paychecks. If you let that money sit in front of you, you’re going to find ways to spend it.
The great thing is that with technology the way it is, it’s easy to get that money out of our hands quickly. Below is an example of how your savings can be automated. You’ve got money coming out of your paycheck in the form of 401k deductions and things like that. Those are great ways to keep that plate smaller since you never even get a chance to spend that money.
Money that actually arrives in your checking account should also be moving towards other places in order to keep your money plate small. I have set amounts that I take out of each paycheck for Roth IRA contributions and long and short term savings goals. This gets the money out of my hands so that I’m not tempted to use it. I then use microsavings apps like Dobot and Qapital to squeeze out just a little more savings from my checking account.
By setting up an automated system like this, you’ll naturally reduce the amount of money that you actually have in your hands. Your plate is getting smaller. No self-control involved. Instead, you’re just tricking your brain to get used to living on the smaller amount.
Make Your Savings Hard To Get
Saving money doesn’t mean anything if you’re just going to dip into your savings whenever you want to buy something. That’s why you need to make sure that money you save is in a place where you can’t reach it all that easily.
Employer-sponsored retirement plans are a great example of how you can make your money hard to get. You set a percentage to save – preferably as high as you can – and you never see that money in your paycheck. Since it’s not all that easy to pull money out of your retirement accounts, you’re much less likely to touch it.
This is another reason why I recommend saving your emergency fund in a 5% interest savings account with Netspend. Not only are you snagging 5% interest, you basically add another layer between you and your savings. That small layer makes it much less likely that you’ll dip into your savings for things that you don’t really need.
Tools To Help You Automate Your Savings
There are a ton of tools to help you automate your savings and keep your money plate smaller. If you’re trying to save more money, you need to be using tools like these:
- Employer Sponsored Retirement Plans – Almost every full-time employee will have access to a 401k or something similar. Take advantage of it, preferably maxing out every plan you have access to if you can (assuming you have at least some decent investment options). It’s an easy way to save without having to exercise any self-control.
- Capital One 360 – Everyone should have cash savings for short term and longer term goals. The best way to save for these type of goals is to automate your savings towards these goals. The key, though, is to keep that money separated from your primary stash. I have a bunch of different sub-accounts that I’ve opened up through Capital One 360. Each month, Capital One 360 withdraws a set amount into each of these accounts. I get to save without even noticing it. If you’ve never used Capital One 360, I highly recommend it.
- Dobot – Even after you’ve done all of your saving, there’s value in trying to squeeze out a little bit more savings. I use Dobot to do that for me. (Check out my Dobot review here). It basically monitors my checking account, figures out if I have a surplus, and saves small sums for me in a separate FDIC insured bank account. It’s like making your plate smaller by having someone else pull food off your plate that you probably don’t need to eat. If you find that you can’t handle the extra savings, just turn it off. My guess is you’ll start getting used to seeing extra money getting saved every few days. The best part is that Dobot is totally free and you even get $5 if you sign up using my link.
- Qapital – I use Qapital basically in the same way as Dobot. Each time I buy something, Qapital rounds up the transaction to the nearest dollar and saves the difference for me. (Check out my Qapital review here). It’s small savings that add up over time. And it’s a nice way to automatically get a little bit more savings each month without noticing it. Qapital is also totally free and you even get $5 if you sign up for it using my link.
You Don’t Need To Force Yourself To Save
Saving money might involve some self-control, I won’t deny that. With things like credit cards, it’s not all that hard to spend more than you have. But when you make your pile of money look much smaller, you’ll naturally start spending less simply because you’ll feel like you have less money to spend.
You don’t need to force yourself to save. Just set up your savings once, put it as high as you can, and get used to living on the amount you see left over. No self-control needed.