I know, I know. We all HATE hearing (reading) about how important it is to budget. Blah blah blah. Pay yourself first. Yada yada. Save for a rainy day. Pish posh. A penny saved is a penny earned. Ugh. The truth is, saving can be hard. I mean honestly, how on earth am I really supposed to take care of my living expenses, pay for my adult responsibilities (here’s looking at you car insurance!), dream of investing AND buy shoes!?!!? I mean seriously.
Sometimes it’s easy to forget that saving really is the foundation of this whole “create passive income and live the life of your dreams” movement. Without having a stash of disposable income, investing in ANYTHING really seems out of the question. I was having brunch with a friend over the weekend, when she and I got on the topic of money, budgeting and the like. She, like me, spent all her life in school and is just now learning how to manage money and other real-world grown up things. She was frustrated because despite earning significantly more than she did in grad school, she was not really saving any money. She felt like she was spinning her wheels and not making any progress towards the life she thought would start to create after graduation.
Tell me about it.
It’s true. Most people have heard of the study that found that your satisfaction does not increase with increased salary after US $70,000. Meaning, money doesn’t make us happy. But let’s be real. I’m a lot happier when I don’t have to cringe when the credit card is swiped in the grocery line. After hearing about her struggles, I cued her in on what I do.
Play automatic mind games with myself.
(enter weird evil laugh) That’s right. I trick myself into thinking I have no money. Seriously. I keep my checking account balance low so I don’t feel like I have any money. It’s weird, but when you feel or think you’re broke, you act like you’re broke. For the purposes of saving money this is actually a really powerful concept. Here’s how it works:
I get paid on the 1st and the 15th (or the next business day after). Typically it take 2-3 days for the deposit to clear so I make no moves until I am sure the money is in the account. Then I took all of my living expenses and lined them up by due date. First were those due between 1-14th of the month, next were the bills due between the 15-30th of the month. Oddly enough, most of them are due between the 15-30th, monthly. This is awesome. I literally have a purpose for each paycheck. I use the 2nd half of the month’s income to pay for all of my recurring bills (mortgage, gas, electric, water, internet/cable, credit card debt, etc.). This frees up the first paycheck for me. (it’s mine, all mine!!) The first half month’s income goes towards my monthly contribution to my Roth IRA, emergency fund, escrow account and pre-paying my disposable cash. I’ll chat more about my “escrow account” later, but for now, think of it as a vacation, car maintenance, and other annoying expenses that come up fund.
Each group of expenses are automatically withdrawn from my checking account into their respective locations on the same day each month. The first half expenses are withdrawn monthly on the 3rd, and the second half expenses are withdrawn on the 18th. This means that by the end of the week I got paid, my account balance is back low and the temptation to spend is gone. Not because I’m awesome (although, let’s be honest…I am!) but because it’s already “spent”. Which brings me to the second critical component of the plan:
Deposit the money into savings accounts at a different bank. Preferably one that does not issue checks or debit card for the account.
When the money is at a totally different account you don’t see it, therefore you don’t miss it. It’s basically the same thing as having spent money on a nice dinner out. Once the money is gone, it’s gone. You just have to make due with what’s left. Same thing here.
So now I’ve let you all in on my little mind game money secret to stick to a budget to boost savings. This is the linchpin to my cash management that allowed me to save money to start investing in the stock market and real estate. If you’re like me and have a day job, then hopefully you find this method helpful.
That’s all for now.