Everywhere you go you hear about the savings rate in the United States being too low. A study in 2016 by Careerbuilder showed that nearly 4 out of 10 people consistently live paycheck to paycheck while another (nearly) 4 out of 10 people sometimes live paycheck to paycheck. This means that at any point there could be up to 76% of people barely getting by and living paycheck to paycheck. The data also confirms a recent study by Bankrate in 2016 showing that 63% of Americans would not be able to cover a $500 emergency expense. 3 out of 10 people would be forced to either charge the expense to a credit card or ask a friend or family member for the cash. To be perfectly honest if I had read this just a few short years ago I’d agree and maybe even think the number seemed low. But a lot has changed in the last several years as I’ve lately become fixated on my finances.
Enough with the statistics, we all know that saving money is much easier said than done. With many different strategies it’s sometimes hard to even gain traction. One method that has really worked well for me is to say that I’ll spend money in the future, once I hit specific goals. You’re probably thinking to yourself that this sounds like something you heard before. Something that people did in the 50’s and 60’s when they really wanted something, something simply called, “saving up for a purchase.” This one’s slightly different I promise.
How It Works
Recently I started paying more attention to what others were recommending for savings strategies. A lot of people either have get rich quick schemes or extremely detailed, esoteric long-term plans. Some strategies are so extreme that they basically want you to keep a full time job while living out of your 25 year old Civic as you save 90% of your salary. Granted I’m not saying anything groundbreaking in this post, but rather simply sharing what has worked well for me.
I start off by first tracking my net worth. As we’ve gone over in earlier posts this is critical. This is done by taking the value of all of the assets that I own and then backing out any debts that I owe. I only include monetary accounts as I am currently renting an apartment and I’d rather be conservative in regards to personal property. This difference between assets and liabilities represents net worth. I will track my net worth every quarter and when I hit a predetermined target, or checkpoint, I’ll allow myself to spend a certain amount depending on the amount of that target. For example, when I hit $10,000 in net worth I was able to spend $50 (.5% of total worth) however I saw fit. Definitely not a huge spending amount but at the same time I didn’t want to spend too much and simply decrease my net worth, which would defeat the purpose. This doesn’t mean you can’t spend money on necessary items or have the occasional night out, but I’m going to use this tactic going forward for my larger purchases.
As the net worth goals increase so should the payouts. For example when I crossed a different threshold I went out and bought a set of used golf clubs ($400) to replace my 15 year old sticks. Since then I’ve improved my golf game and I’m 100% satisfied with the purchase since I stuck to my plan. Clearly you don’t want to set so many targets that you are constantly spending but you do want to set enough to keep you motivated and to allow a nice balance between spending and saving. It’s a great tactic for someone who doesn’t typically spend money on themselves to have a little fun, all while keeping their eyes on the prize. Let’s face it, sometimes we just need to take a break and recharge our batteries. If you are still reluctant to spend some of your hard earned money you can always decrease the payout to something very small, just as a small treat to yourself.
Pros and Cons
Increases motivation to save
Forces a person to track their wealth
Makes you choose what you really want to spend your money on
Gives you time to consider if a certain purchase is really what you want
Buyer’s remorse is minimized as the money was earmarked a long time ago
Small payouts initially
Delayed gratification is imposed since you can’t have everything that you want now
Small decrease in net worth is realized just as you hit your target (and no, you don’t get to spend that amount again if you dipped below your target and then back over it)
To increase net worth more quickly people might engage in riskier investment strategies
By using this method I have made saving money and tracking my net worth fun again for me. It really makes me consider what large purchases I want to make and at what checkpoints they are appropriate. The next checkpoint’s payout? A trip to Colombia with the girlfriend for a nice vaca on the beach. Might as well with the dollar up vs. the Colombian peso. #Savings.
Do you think this plan could work for you? What sort of targets/payouts would you allow yourself?