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, 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.”).
How To Save Money vs. How To Spend Less
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 PT 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: 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 to save money (to really, truly save it) 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 Capital One 360.
The Setup: The Best Way to Save Money
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.
Are you already doing this? Share your advice on the best way to save money in the comments below…