The Power of Savings

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The Neo-economy

Recently there were two articles that were circulating caught my attention. One by an Economist, who said savings are old fashioned and bad. The modern economy or the neo economy as they call stands tall in the ability and the power to spend. The article cited Japan as a country which saves a lot but is in huge economic problem. The China other hand saves and invests in America. America doesn’t save but have invested in China and Japan. But the amount America invested in both china and Japan combined, is less than what china has invested in America. That is because American people spend and this spending stimulates the economy. The other article is the one which said why we won’t be buying anything in the future as we would be able to rent.

The savings and the financial freedom

While I agree the market economy, consumerism are all good for the system to an extent, if that happens at the cost of savings, then I think it is a danger sign. I recently read a wonderful article which emphasized on the power of savings. I believe all your financial plan should start with the agenda to save more every month. As the millionaire’s money quote says “it is not how much we make, it is how much we keep, that makes us millionaire” The article gave an example, take three persons A,B, and C. And A is making $80,000 after tax and B is making $60,000 after tax and C makes $40,000 after tax. All three if they save 50% of their income they need the same amount of years to reach financial freedom. Take a look at the chart below.

I mentor some people and I always emphasis them to have a lifestyle of just spending 45% of their income and to save the rest of them in an emergency fund. I insist on the point “The goal is not to look rich today, but to be real rich in 5 to 10 years”. Here are few tips how to save more money in a month.

Practice Frugality:

Having a complete awareness of what I need and what I want, can bring a world of difference in your finances. Just stick with what you need. Don’t give much until you can give more. Rockefeller, one of the most celebrated billionaire in the world once told “I could not have had the first million if I didn’t tie up my first salary which is $1 and 50 cents a month”.  It is not so tough to be frugal and it is definitely not a sin to practice frugality. Living in 45% of income is very much possible and we have lot of evidence for that. The famous Blogger Jacob Lund Fisker who has written a book “Early retirement extreme” lives on just $7,500 a year. He has an active, thriving lifestyle too.

Have the right group:

Be friends with people who like to save more than spending. Make sure you are roommates with them, have coffee with them, have discussions with them regarding money. This can multiply your urge to save more every single month. If you are not able to find such friends, then please don’t compare their lifestyle with yours. You need to live life on your terms, not on theirs. So it will be great if you can find a community where saving is celebrated, if not please avoid comparing the way other people live with how you live.

Always budget:

Have a plan for your spending, not every month, not every week, but every single day. Make sure you are spending on only what you need, rather than spending what you want. Budgeting is a wonderful practice to tame our not so good spending habits. Most people don’t budget because they got the map all wrong when it comes to spend our money every month. Most people give (liabilities), Spend (without budgeting) and then try to save (if anything is left out). We have to change this cycle if we want to start budgeting. We should give, then save, then spend what is left over. In this case you have to practice budgeting and frugality.

Avoid Impulsiveness:

Managing your money has a lot to do with managing your emotions. Impulsive buying is one main villain to your plan of saving more money. If you have mastered the art of budgeting you can avoid this impulsive buying to a great extent. If you are a beginner, then don’t fight it, but have a cap on impulsive buying every month in the budget. In that way you will have the awareness to spend less and save more. The other idea to minimize this impulsiveness is sit on the idea of buying for an hour or two. Neuroscience says there is a part of our brain which is called amygdala which is responsible for the impulsiveness. If we can wait for 6 seconds the control from anygdala gets transferred to Prefrontal cortex, the thinking part of the brain. So if you feel the urge of buying something immediately, sit on the decision. Wait for an hour or two, to give the control back to prefrontal cortex.

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