How To Save Money vs. How To Spend Less
Here in the personal finance blog-o-sphere there’s a ton of talk everyday about how to “save money”. In fact, I doubt a day goes by without a post with those words in the title. I get in on the action too. One of my categories is actually “How To Save Money.” But often times, if not a majority of the time, the term “save money” is used to mean “spending less” on something you purchase (i.e. “I saved a ton of money on that new hybrid car I just bought.”).
I’ve got nothing wrong with this use of the term. I love spending less. I just think spending less and calling it savings is a bit overused, especially by clever marketing departments. And using it this way dilutes the true, full meaning of the term.
Here at Prime Time Money I *try* not to use it in this way because it sends the wrong message…that all you have to do is spend less on something you’re buying and you’ll have more savings. Instead, I try to actually say “spending less” when that’s what I mean. I’m not trying to insult your intelligence here…don’t get me wrong. I’m just trying to emphasize the point that:
Saving money is setting your money aside to be used at a later date.
That’s all that it is. If you’re not doing that then you’re not truly saving in the full sense of the word. You’re just spending less.
Direct Deposit in a Separate Account
The best way I’ve found to truly save money is to have a portion of your pay check direct deposited into a separate account. By separate, I mean, not your normal checking and savings account that you currently have that you access everyday; a completely new account. This could be a 401(k) account, an IRA, or a plain ole savings account, to name a few. Either way, the money is going from your employer directly into a separate account that you plan to access at a later time.
Some advantages of this type of setup:
1. Spend the Remaining Balance – Since you’ve got your retirement savings (401(k) and IRA) and short-term savings taken care of first, you get to spend all the money that makes it to you’re spending (i.e. checking) account without worrying about saving after you’ve done all your spending.
2. It’s Automatic and Works Without Discipline – If you’re depending on yourself to take money from your regular checking account and put it in your savings account, then you’ve got a tough road ahead of you. I sure can’t do it.
3. Your Saved Money is Not Easily Accessible – I don’t know about you but when I used to try saving my money into a regular savings account, the money would not stay there very long. Because the money could instantly be transferred to my checking account, I ended up spending most of my accumulated savings shortly after I built it up. By putting your money in a separate, less accessible account, you’re more likely to leave it there where it belongs until you REALLY need it.
4. Earn Some Extra Money – By having a larger portion of your cash in a separate account (401k, IRA, High Yield Online Savings) versus a regular savings account, you’re more likely to earn better interest on your money. For online savings account, I like to put my money directly into a high-interest online savings account with ING DIRECT.
The Setup
How hard is this to arrange? Most human resource departments will gladly split your check into multiple direct deposits, as long as you can provide the routing and account numbers. Figure out what percentage you need to go towards spending, then tell them to put the remaining percentage to your separate savings account. Start off conservatively. For more on how I have my direct deposits currently set up, see “How I Set Up My Bank Accounts.” You’ll be surprised by how quickly you learn to live with this, and how easy it is to watch your savings grow.
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Are you already doing this? Share your advice for truly saving more money in the comments below…
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I have to do the separate direct deposit thing or else it gets “blended” into my budget instead of actually saved. Theres always something that comes up thats on the borderline want/need fence and if the money is in the checking account, it gets used.
True. Those “borderline” expenses aren’t as easy to make with this method. Of course, if you make enough money, do your saving first, and then have a ton left-over, you can essentially have your cake and eat it too.
Very good point! The key to saving money is not spending less, but saving first. I have never tried splitting my paycheck direct deposit, since I get paid every 2 weeks I just schedule a bi-weekly deduct the day after I get paid. May have to set up up direct though.
I totally agree that the best way to save is to have money from your pay direct deposit into a separate account. This method of saving has worked very well for my wife and I. A saying that I like for this style of saving is “Pay yourself first”.
“Saving money is setting your money aside to be used at a later date.”
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I set up my accounts as PT described some months ago, and it works well except for one flaw. ING allows you to instantly transfer money from savings (Orange) to checking (Electric). Self control is still the name of the game here.
The more “automatic” you can make your savings the better.
It’s not how much you make, it’s how much you spend. When you can stop counting what you earn and only count what you save and spend, your financial life will do nothing but improve. Where you focus is critical to saving money.
People make the mistake of counting what they earn and basing their spending on how much they count.
Make believe that you earn half of what you earn. Impose your own tax on your income. If the government imposed a tax on your income, you’d figure out a way to survive on what’s left. Why not raise your own personal tax by 20% and figure out a way to survive on what’s left?
Isn’t it amazing how you always manage to survive on what every income you have? Think about that one for a while.
Dave Drew
Your Money Saving Coach
http://www.yourmoneysavingcoach.com
I agree that direct deposit is the way to go. I also try and carry less cash in general. Some sites advocate paying for everything in cash but whenever I’m carrying any money at all, I tend to spend it. Great post!
I have used this method in the past and it has worked well for me.
I have a partner and a mortgage now though. We tend to pump as much money into the mortgage as possible now rather than using a savings account.
Although our retirement saving comes directly out of our wages.
My tip, focus on the small pleasures in life to spend less.
“Saving money is setting your money aside to be used at a later date.”
Well–not really. Although setting money “aside” where it is not easily accessible *is* a useful technique for managing savings, it is not savings itself. It might be more accurate to say that “Savings is the difference between what you earned and what you spent.”
Tthat being said, “sequestering” money in a separate mental or physical account (which is what many people call “savings”) is very useful in removing that money from immediate view. Money that is in immediate view can easily be seen as “spendable”. Putting it “away” where it’s harder to see and harder to get at eliminates some of the temptation to expend your accumulated savings. So in that case, what you wrote is accurate. But really, there is no hocus pocus about it and from an economist’s point of view, “savings” is simply the difference between what you earned and what you spent.
My above comment supports your statement that having money direct deposited to a separate account from your “spending” account is a great way to increase savings–what it is doing is decreasing the amount you spend, by taking a sum and putting it out of your view and out of your easy reach. that is why auto withdrawals and direct deposit arrangements are so useful.
For cash money that you have on hand, stuffing some of it in a jar and putting in an inconvenient spot or one that is simply out of view is a way of doing that as well. Out of sight, out of mind and won’t be spent. Or, won’t be spent without forethought.
Using an envelope system for food expenses and entertainment expenses is another example of this same phenomenon. YOu make a mental definition of one stack of money as “for” food, and when that money runs out, it seems like you are out of money for food and you have to stop buying it. You won’t be as likely to pull extra cash from elsewhere in your wallet because of this “mental category” and mental separation or wall that you have put up between “food money” and “entertainment money”.
@Steve – Thanks for your comment. The definition of savings here is as it relates to personal finance, not economics.
It’s a change in mindset that I’m getting at.
Wow, that was a fast reply!
I appreciate your distinction between the kinds of definitions of savings.
However, although my definition is more from economics than from PF, I have found that looking at savings as being the difference between earnings and expenses *is* actually useful from a PF point of view, because it emphasizes that at the end of the day, you need to spend less or earn more if you are going to actually save and have it stick.
Then, putting the savings aside is a separate account tends to help it “stick” a lot longer, as it is no longer in plain view everytime you log onto your checking account or go to the ATM.
As a practical example, I leave no more than one and one half months’ expenses in my checking account. At the end of the month, anything above that figure goes into a separate savings account so I don’t suddenly decide I’m rich and go on a spree.
It creates an environment of “artificial scarcity” (I learned that phrase from the book the Millionaire Next Door!).
I might keep less in the checking account, but I decided I liked not having to worry about my balance at all and just having to go to the bank a maximum of one time per month, so I keep 1.5 months’ expenses in there at the start of the month, and shunt any extra to savings at the end of the month.
@Steve – I definitely agree with the idea of spending less than you earn. And I agree that it sums up personal finance in one phrase. And I follow it in my own life.
However, I don’t necessarily use it to teach people because it’s somewhat of an empty comment. After it’s said there’s a “so what” or “duh” moment. Everybody knows that you should spend less than you earn to keep your money. At least everyone with a basic understanding of math.
The problem is that we still have a nation of overspenders, not savers. People know that 2-1=1, but they are running their lives with a 2-3=0 mentality.
For me, “automation” and “separation” are more actionable philosophies. Which is what this particular post was getting at.
I really like your mention of “artificial scarcity.” That’s something I should blog about soon. My wife and I make a pretty decent amount and so savings has become easier, but we do allow ourselves to feel that scarcity and it keeps us in check. Good stuff. Thanks again for your comments.
Great clarification of “saving” vs. “spending less”. While having to spend less, on something you are already going to buy, rocks, saving money for a specific goal is especially gratifying. Plus, the act of saving money truly instills the discipline of delayed gratification/patience, and helps one determine how and where he/she wants to spend their money.