When it comes to money we all hear different messages. Some may say money is the root of all evil. Others may say that you can never have enough of it. Dan Buettner, international renowned speaker and National Geographic fellow, has looked into what part money plays in happiness. In his book, Thrive: Finding Happiness the Blue Zones Way, he sums up the key to happiness in your financial life with this simple statement: Save Mindlessly, Spend Thoughtfully. On the Blue Zones website you can find the following description:
Ed Diener, author of Happiness: Unlocking the Mysteries of Psychological Wealth, says that the key to greater well-being is to have money but not to want it too much. The best long-term strategy for financial affairs puts in place the disciplines and mechanisms that help you save mindlessly and spend thoughtfully.
When it comes to finances take time to remember your goals. Go beyond the things you’d like to have. Imagine what you’d like to feel. When I started my debt payoff journey I felt stressed and guilty whenever I bought any non-essentials. So I began to image the ease I’d feel debt free, and that became my guiding principle. From there I looked at my finances as an opportunity to improve my life rather than a burden. In this post I will discuss what saving mindlessly can look like and in the next what spending thoughtfully means to me.
Saving has been good for my health; I no longer feel the stress of living paycheck to paycheck. Mary Beth Storjohann, CFP outlines the way to step away from this cycle in her article Stop Living Paycheck to Paycheck. A new survey from Bankrate.com states that a third of Americans would go into debt if they had an unexpected expense of over $1,000. For years having debt, especially credit card debt, felt like a ball and chain. I didn’t feel like I could build an emergency fund while paying crazy interest rates. At the same time every little emergency dug my hole deeper. In my experience, saving and paying off debt are very similar because they focus on the future. In both instances I need to keep my dream of financial ease at the forefront.
How do you save mindlessly? The same way you do anything mindlessly: by building systems. Systems are habits. Say you have the habit of dropping your loose change into a piggy bank or buying a $5 latte on the way to work. Both are habits, or informal systems.
The easiest way to build systems around saving is to automate as much as possible. If your workplace offers retirement plans start putting money aside through them. You can start with a low number and build yourself up over time. Most banks will let you open targeted savings accounts where you can build an emergency fund worth 3-6 months of living expenses. Or you can save for big ticket items like a car or a vacation.
The point of saving mindlessly is to create grace in your budget. Unexpected expenses are normal. Unfortunately, the amount of the expense cannot be predicted. If you were to have a $5,000 emergency come up, what would you do? Could you pay it from your cash flow, your savings, or would you take on debt? All three are valid options, but focus on which one works towards your overall well-being. Think back on what you have done in emergencies before and decide which experience worked out the best overall.
Where to start?
When it comes to savings my first goal was an emergency fund because I was tired of stressing out every time something in my car needed to be fixed. More than that, I hit a bottom when I could no longer deny that my entire personal finance situation was stressing me out, not just emergencies. I remember the day I paid all the immediate bills and realized we only had $32 for the next two weeks. Fortunately my boyfriend at the time had been saving money for my birthday and we were able to use that for groceries. Otherwise, we would have resorted to more credit card debt. This experience clearly told me my lifestyle was not working.
At this point I asked a close friend for help. She had her own financial house in order and had done very well for herself. She worked with me to figure out how much of my income could be put away. I then created an automatic transfer out of my checking into savings. Once we had $1,000 we began to pay off debt as follows:
- Credit cards – finished Dec ‘13
- Student loans – finished Feb ‘15
- Extra money??? This is when I began saving to replace my car and set up a vacation fund
For four years I have consistently been putting away money for my future well-being. At first I paid off debt, and now I can save for large expenses. Today saving is mindless, I never think about it. Contrast this to before I built this system. Five years ago I was always thinking about saving and paying off debt: I constantly scolded myself for not doing enough of it…
How much should I save?
I don’t remember how much I saved when I started, but it wasn’t much. I didn’t really have a budget so I guessed at what might work and used the book All Your Worth by Elizabeth Warren to find what was feasible. Elizabeth is a US Senator and previously a Harvard Law School professor, you can find a wonderful review of her book at Get Rich Slowly. Also, JD Roth created a worksheet that can help you find out where you stand and where you can start moving towards. Regardless, start with an amount that will not deprive you, while at the same time it must be substantial enough for you to see progress.
Adjust your savings rate whenever your income changes. Adjust it when you reach a goal, either funding your Roth IRA for the year, paying off a debt balance, or going on the vacation you’ve been planning. Adjust it when you become re-energized about reaching a savings goal and want to be more frugal with your discretionary spending. The point is adjust your savings rate. It is YOUR savings rate. It is meant to put your future self in a comfortable place and to allow yourself to be financially confident today. After a few months of consistently saving I felt the psychological benefits. I saw that I could one day be debt free. I then saw I could fully fund my retirement for the year. I now see that I can replace my aging car and go on vacations.
What could go wrong?
You could have an emergency before your emergency fund is fully funded. You could get laid off. There could be a really great sale on shoes, Groupon vacations, or a once in a lifetime concert. You could have a bad day and decide you need retail therapy. It could be Christmas/Hannukah/wedding season. You get the idea…
All of those are valid reasons to stray from the saving system; doing it once will not wipe you out. However, be conscious of whether emergencies/sales/etc are coming up very often. You might be saving too much thus not giving yourself enough room to enjoy your money. One thing I have done is set up a “discretionary spending” savings fund. I put away $200 every month not for savings, but for things like birthdays, weddings, or sales. At first I did not set anything aside for those things. I quickly learned it was almost impossible to have no discretionary spending funds after spending all of my week’s “allowance” on a wedding gift. It left me wondering whether I should be resentful at my friends for getting married or at myself for having a budget. The reality is that I was learning what works for me when it comes to discretionary spending, and I’m still learning about it.
Another possible reason you may be dipping into your savings too often is that the money is too easily accessible. One of the best things about saving for retirement in an IRA is that I cannot access the money for another 30+ years. When it comes to my emergency fund I have it in a spate online bank. When I need money from it I need to look for my password, sign on, initiate a transfer and wait three days before it clears. For me that’s enough of a hassle that I won’t do it unless it’s absolutely necessary.
How do I stick to it?
I have always been a saver, or at the very least I have always thought of myself as one. However, for a long time I dipped into my savings account almost monthly and my paltry emergency fund would not have covered any real emergency. Like I mentioned earlier, after I hit my bottom I talked with a friend about the stress I felt. From there I recognized I had been both oversaving and overspending, thus the mounting credit card debt. She helped me create a more balanced budget; I could not do it on my own just by reading personal finance blogs and books.
After our talk I felt accountable. She never asked me about my finances, but I knew she wanted my best interest and I reached out to her whenever I had any questions, doubts, or concerns. I also focused on the progress. After saving a $1,000 I felt empowered. From there I mapped out how long it would take to pay of each credit card. I focused on the smallest balances to keep myself motivated.
Lastly, be gentle with yourself. Maybe you didn’t grow up with people who modeled financial prudence. Maybe you don’t make enough money to save. Maybe you have someone that always bales you out of financial emergencies so there is no real need to save for them. Regardless, if you want to enjoy more ease in your finances having a mindless saving system is the way to go.
Do you have a system that allows you to save? I’d love to hear what it looks like and how you developed it.