Here are the statistics:
According to the Federal Reserve, the American household has a median balance of $5,300 in their bank account.
While this amount might seem decent for a single person, you might find yourself in a tight spot if a crisis were to happen and you need to feed a family of 4.
Break it Down and Build It Back Up
Figure out what is your savings goal this year.
Is it $7,000, $8,000 or maybe even $9,000? Sounds like a lot of money in a bank account. This may seem hard to achieve or even unattainable to some.
Your barely scraping by, you don’t really have a 3–6 months emergency fund, perhaps now may be a good time to get started.
Let's say you want that $9,000 in savings at the end of the year.
- You need to set aside just $24.66 a day ($9,000/365days).
- Which is around $750 a month ($9,000/12 months).
- Or roughly $187.50 per week ((9000/12)/4weeks)
Seems manageable I guess, $24.66 a day doesn't seem like such a daunting number.
Here is a trick instead of thinking you are only saving $24.66 a day but rather think of it as you are saving $9,000 a year, it will keep you even more motivated. By switching to this bigger number you are more conditioned to fight off the YOLO (you only live once, struggle that we all know too well).
The secret of impulse control
Here is a very relatable quote by Oscar Wilde.
“I can resist anything except temptation.”
― Oscar Wilde, Lady Windermere’s Fan
You and I give in to our impulses at times because we want to release dopamine which makes our body feel good. That speaks volumes.
In relation to our buying impulses, you don’t actually get the huge hit of dopamine when you are buying something, but rather it is the anticipation of buying something before you bought it.
Companies all over the world know this too well and exploit this on their consumers:
- You see this with companies, like Apple before the launch of its iPhone which builds up huge anticipation for consumers and gives very little hint of its final products.
- Movie companies, build the anticipation through blockbuster campaigns and tours before the launch of the movies.
- Grooming products or apparels company may launch images in anticipation before the new collection hits stores to build the desire and anticipation amongst consumers to want to acquire the new product when it is released.
Automation
There is something called loss aversion. This makes savings so hard. This is when you feel strong negative emotions and you perceive that you are losing money.
You know what I’m talking about.
- It’s the feeling you get when you take out a chunk of your money and put it into a savings account, your brokerage account, your Roth IRA, or your pension account.
Our lizard brain perceives that we are losing money, even though the reality is it’s still our money, it just goes into one of our other accounts for ourselves to use one day in the future.
The trick is to automate your deposits on the same day as your payday.
That way you are literally taking a hands-off approach and need not need to manually transfer money out of your account on your own.
- This makes saving and investing a seamless process.
- You don’t need to ever worry about spending the money that you don't have available in your account. This is kind of a force method of savings.
- Saves you time and energy.
- You reduce how your brain perceives loss aversion.
Here’s an example, you earn $67,000 a year and you automatically set to deposit 10% at the end of the year, you would have basically earned $6,700 in your savings without you even lifting a finger.
Think of this as a self-tax, in which your “future you” is charging you a 10% tax on your earnings so that the “future you” can be financially free. You’ll make the “future you” happy because you’ll have set money aside in the future which makes the “current you” feel good knowing that you were wise with your money.
Conclusion
When you understand how saving money can be done in an efficient way, you realize how much easier it is to get started and have money accumulate for you over time.
Breaking it down to smaller numbers and being smart with how you save money can provide you with the assurance that you need for your future.