Why don't people save? It could be one of several reasons: lack of knowledge, lack of motivation, lack of drive, or lack of discipline. Is this you?
The Barrier and the Hurdle
Saving doesn’t occur because of a knowledge barrier and an inability to get over a psychological hurdle.
Think of some of the excuses people have:
- I don’t know where to save – KNOWLEDGE BARRIER
- I don’t know how to save – KNOWLEDGE BARRIER
- I can’t save – PSYCHOLOGICAL HURDLE
- I don’t have enough money to save – PSYCHOLOGICAL HURDLE
- Prices have gone up and now I can’t save – KNOWLEDGE BARRIER & PSYCHOLOGICAL HURDLE
Many people have a tough time getting over the knowledge barrier which leads to losing any motivation. Think back to your days in college. Even though you liked a subject, you HATED one. You would go to the library motivated as hell to get a good grade on the exam. Once you started reviewing the material, you would get frustrated that you didn’t understand it. Then, you would take a break, go back, and continue to be frustrated. All that motivation at the beginning was lost and you might as well not shown up for the exam. You was beat before you even started.
That’s how many individuals react when it comes to savings. A recent Wall Street Journal article stated that 26% of Americans have ZERO emergency savings. Don’t let yourself become part of that statistic.
The first step we need to overcome is the knowledge barrier. Here’s how we would view saving money. Lay each brick in sequential order to build your financial pyramid.
Brick 1 – Pay off your debt: Although this may not seem like saving, it is. By getting rid of the bad debt (student loans, credit card, etc.), you are creating the true foundation for financial stability. In order to reap the full benefits of this first brick, DON’T continue racking up debt while on this level.
Brick 2 – Build emergency reserves: This is money that should be used only in emergencies. For instance, your car windshield breaks and you are waiting on the insurance money to come in…dip into this fund to pay for it and then fill your emergency reserves back up when you get your insurance check. We need three to six months’ worth of expenses to solidify this brick.
Brick 3 – Short term cash: This is savings for an expense that is coming due within one to three years. Maybe it’s a house or an engagement ring. These monies should be invested in very safe investments… just in cash or a CD.
Brick 4 – Match your 401k: If your company offers a 401k, increase your 401k contribution amount to be at least what the company is matching (if they are matching at all). Matching just means that if you are participating in the 401k, the company will contribute some money to your 401k as well. Think of it as free money.
Brick 5 – Max the Roth IRA: This is dependent on your tax filing status and current income (see 2014 table here). But, if you are able to contribute to the Roth, then set a goal to put $5,000 ($6,000, if 50 years or older) into it. Money goes into a Roth after tax and comes out tax free… and the money grows tax free within the Roth. Wahoo!
Brick 6 – Max out your 401k: Remember that account where we have free money? Well, we can actually put more than that amount (likely) into the 401k. The max that we can contribute is $17,500 per year ($23,000, if you are 50 years or older). So, set a goal for an amount that gets you from your contribution on Brick 4 to your maximum ($17,500 or $23,000).
Brick 7 – Put money into a brokerage account: Many refer to this just as an investment account. No maximum amount restrictions or investment restrictions. It’s an account that allows for you to invest in any type of investment, such as a stock (Apple, IBM, etc.) or bonds. But, there are no tax benefits to a brokerage account, but it is very useful to our pyramid.
Bite Size Motivation = Chunks Worth of Savings
The second step is to overcome the psychological hurdle. We need to find a way to stay motivated and not let ourselves lose before we ever begin. Saving is a daunting task. Unless we are saving for Brick 3 (short term cash), we aren’t really going to see fruits of our labor for a long time.
- One source of motivation is reward or instant gratification, so instead of looking at your savings as this extremely long term task, cut it up into bite size pieces.
- Set a reward for completing each savings brick. Now, there are only seven bricks, so each completed brick would be a large reward. Maybe treat yourself to a meal at that steakhouse you have been eyeing for a while now, or maybe buy that piece of jewelry you have wanted (within reason)! Set these larger goals and write them out somewhere so that you will see them daily (maybe the bathroom mirror).
- Okay, that’s done, but it’s still too long because it could be multiple months or years to accomplish some of those bricks. Cut the task into even smaller pieces. Take each brick as its own task, and break it down into monthly goals.
We know what our emergency reserve goal needs to be our monthly expenses multiplied by three.
Emergency Reserve Goal: Monthly expenses * 3
Take this number and divide it by six or twelve (however quickly you want to complete your smaller goals to get the bigger reward).
Smaller Goals: Emergency Reserve Goal/6 OR Emergency Reserve Goal/12
If you complete each smaller (monthly) goal, treat yourself to a small reward. Maybe that movie you have wanted to see or that bottle of wine you have wanted to try.
Be sure you don’t use all of your savings for your reward. Use just a small piece of it. The goal is to save, but the mentality with this program is that if you save $100 and spend $10-20 of it, you have still likely saved more than you would have if you didn’t reward yourself.
Brick by Brick We Can Overcome the Barriers and Hurdles
It’s easy to sit here today and say I wish I had created Google or found a way to better understand statistics… because they are either irrelevant or not that realistic.
However, money is both relevant and realistic, and, unfortunately, too many people wait to worry about savings until it’s too late. Many times I hear that people don’t deal with savings now because they don’t think it’s relevant to them. They think they’re too young to worry about savings yet. That’s completely false.
Down the road, we don’t want to have that, “I wish,” thought about saving more. The barriers and the hurdles have been torn down. Now is the time for us to begin the process that will allow for us to say down the road, “thank goodness I started saving early.”