In a preview post I discussed a really important distinction between cheap and frugal people in the finance world. Yet, despite this important distinction many people who need to save money don’t take either approach. In fact, most people, when faced with money issues or a sudden change in financial position, do something much worse:
They give up.
I’ve heard and seen it over and over again in financial forums, in comments on this and other blogs, and in my personal life. So many people see saving money, whether through couponing or other means, as too much work or something they just cannot understand. It is “too hard,” they say. So they give up.
And that is about the worst thing anyone can do when faced with financial uncertainty.
Yet it is also the easiest.
However, learning how to save without putting much effort towards it is actually easier than most people think. No, you don’t need to pour over supermarket circulars for hours or eat Top Ramen for months. You just need to learn to do more with less, which starts by tricking yourself into thinking there is less there in the first place.
Understanding “Scarcity of Attention”
Harvard economics professor Sendhil Mullainathan has an interesting theory about why people find saving money so hard. It is not a matter of “self-control” as many self-righteous financial gurus would have us think. Rather, it’s a matter of what he’s dubbed “Scarcity of Attention.”
In essence, the theory of Scarcity of Attention says that when making ends meet is the primary goal, saving for the future, whether that means college, retirement, or building a nest egg, takes a back seat because it seems less pressing. We cannot convince ourselves to take money each month and put it into a savings account when we need that money to buy groceries or pay the electric bill.
The problem is that not saving actually compounds the problem of making ends meet both now and in the future. Without a nest egg you are out of luck when your car breaks down. Without retirement savings you are dooming yourself to work until you die. This merely contributes to the cycle of anxiety that accompanies the “living paycheck to paycheck” reality.
How to Pay Yourself First
Dr. Mullainathan is a huge proponent of automation when it comes to saving because it makes “paying yourself first,” a literal no brainer. And, in the age of internet banking, doing this is easier than ever.
But wait! What if, like I mentioned before, you need that money? To that, I ask, what would happen if your hours got cut at work, or you got laid off, or even if your healthcare premiums got higher? You would have to figure out a way around it, right?
Well, that’s exactly what you need to pretend is happening now.
The good news is that you don’t need to make changes as drastic as those “real” things right away. In fact, it is best to start small. Even saving $25 a paycheck adds up nicely over time.
Learning to save, especially in such small amounts, is a little like jumping into a cold pool. Once you do it the first time, you are ready to go again because it doesn’t seem so harsh.
One easy way to do this is to use modern banking to your advantage. If you are paid every other Friday, have an automatic transfer to your savings account set for every other Friday.
Start small, then, gradually increase the amount. Work out a schedule. Say, every 3-6 months you alter the amount incrementally. So start with $25 and then raise it to $50, to $75, etc. This is the same method used by many companies and marketing firms to get your business and make money off your account.
They offer you a service for free or for a low price for the initial few cycles. Then, they start to charge you, sometimes more and more, through an automated pay system (like a credit card) and you don’t notice.
We’ve all gotten sucked in by these methods. Why not use them to benefit us instead?
Counting Your Financial Blessings
I’m going to fall back on an old cliché because I think it’s especially valid in this case. It is easy to face the “problems” of the now when you also focus on the benef