How to Start Saving Money
29 August 2022 0
29 August 2022 0

Enriched Academy Staff

We often hear the mantra, “pay yourself first” when it comes to financial advice. This concept of automatically routing some of your salary every payday (before you can spend it!) into an investment account like a TFSA or RRSP isn’t hard to understand, but it’s hard to implement if you need every nickel just to survive until your next paycheque.

Discipline and dedication to the cause will help, but they are only part of the savings solution. The fact is that to succeed at saving in today's world, most of us will need to earn more and spend less.

It’s obvious that a higher income will help you mow down expenses and leave you with more money in your jeans at the end of the month. However, any size paycheque will go a lot farther when supplemented with restraint and monitoring to control expenses at their source... before they vacuum up your potential savings.

Making more money is often the preferred approach as cutting back on spending can be painful, but there are definitely some drawbacks. More income means more taxes and it may also lower benefits like your GST rebate or CCB benefits. If your tax rate is around 20%, an extra hour at $15 hour will have the same effect as cutting about $12 from the household budget.

Working more will also rob you of precious free time, so there are significant social costs as well. If you have to incur additional expenses such as a babysitter or dining out more because you have less time or energy to cook, those costs need to be factored in as well.

Perhaps the biggest problem with working more is the very strong tendency to spend more! This is where discipline and determination come into play — make sure you earmark that extra income for saving and keep your expenses at the current level. Making more money won’t solve your problems if you don’t monitor your expenses, make poor spending decisions, delay investment planning, and have no goals to help motivate you and measure your financial progress.

You should also look at your debt cost to see if you should be saving in the first place! If you carry a credit card debt for example, you should definitely be throwing everything you have at it instead of saving. Even with the recent rise in interest rates, you would be lucky to get 4% on cash savings — most credit cards have rates four or five times that figure. You could also invest any extra money, but you have to add in the risk factor, and you would be hard-pressed to get returns that exceed the interest rate on most credit cards.

Turning to defensive savings strategies, there are countless articles churned out every day on how to trim the household budget. They may yield some good tips that are practical for your situation. Look for easy to implement ideas like comparing grocery store prices and stocking up on bargains, collecting points or discounts on a credit card (but paying the balance in full every month!), or clipping coupons.

There is no end to the money-saving ideas and hacks, but the first step is to know your costs. You can’t kill what you can’t see, and household expenses are no exception. You need to track all your expenses for at least a month and analyze where your money is going.

You may find some low-hanging fruits like a lightly used membership you could cancel, or maybe you didn't realize how much those nights out on the town are adding up to every month. On the other hand, you may find the low-hanging fruit is long gone and that making more money is your only way forward! Make sure to track your expenses first and give yourself a realistic starting number before you dive into a more austere budget.

For life’s necessities and things we need to survive, there is no need to ward-off the temptation to spend. We can focus on straightforward techniques that work for our situation and allow us to get the items we need at the best price, whether that’s clipping coupons or visiting a few different supermarkets to get the best deals for your weekly food shopping.

However, even the tightest of budgets include some discretionary spending and that is where some alternative strategies for spending less come into play that are quite different from the simple tips and tricks we see every day.

For example, maybe your “go-to” coffee shop has a stamp-card type offer where you buy ten and get one free. Rather than focus on that future free one, maybe some other thoughts would help you skip that coffee altogether? You could try mentally calculating the cost of your take-out coffee habit into time spent working, or simply pause to ask yourself, “do I really need it, or just want it?” You could also remove the temptation altogether by making coffee at home, taking a route that doesn’t pass by the shop, or throwing away their stamp card altogether.

For discretionary spending in particular, psychology is an important aspect when it comes to controlling urges. Spending can be triggered by a number of factors that affect are psyche — advertising and social media; comparing to our friends, neighbors or colleagues; habitual behaviour; lifestyle creep; the pursuit of happiness.

While it may be possible to limit your exposure and/or do your best to ignore these types of influences, there are financial self-control strategies that can really help put the bite on spending. A lot of personal finance research has focused on these tactics and the summary below has some practical ideas you could start using today.

  • Avoid tempting people, places, and activities (restaurants, malls, online browsing)
  • Eliminate spending temptations (e.g. make your own coffee/meals at home)
  • Use a shopping list and stick to it
  • Make regular savings automatic (set up payday bank transfers)
  • Set financial goals, track savings, and use a budget or conscious spending plan
  • Make funds difficult to access (lock or limit credit/debit cards)
  • Always consider your long-term financial goals (retirement, kid’s education, buying a home)
  • Reconsider your needs versus wants — we all did without many “needs” during the pandemic!
  • Use a “cooling-off” period before making a major purchase
  • Rely-on others for support and self-control (spouse, partner, friend, relative)
  • Convert the cost of an item into time spent working to earn that money
  • Choose to pay now rather than pay later or installment options
  • Use a retirement savings projections plan to understand how your current spend affects that plan.
  • “Lock” your savings away using term-deposits or registered accounts like an RRSP
  • Save before spending and not vice-versa
  • Always consider the reasons for your financials goals (family, retirement, etc.)
  • Use rewards for self-motivation (e.g. reward yourself with a take-out lunch after 20 days of brown-bagging)

At the and of the day, it doesn’t matter whether you save money through self-analysis and careful justification of spending decisions, or by picking up a sale-priced, jumbo size can of coffee and firing up the kitchen coffee maker every morning... whatever works for you!

Rising inflation and higher prices don’t appear to be a short-term trend, so now is the time to dig into your financial habits and maybe add a little anti-spending psychology to your mental money game.

Finding the cash to move from a paycheque-to-paycheque existence to a situation where you are saving and investing is becoming increasingly difficult these days. More income will certainly help, but you will also need to continuously manage your expenses and make smart buying decisions to really pile up the savings.

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