Trying to save money can be a bit of a struggle.
You have probably heard and tried so many suggestions to start saving money: minimize expenses, monitor how you spend money, make a budget, avoid incurring credit charges and the list goes on and on. Let’s take another approach.
Let’s say that you have considered putting aside some money.
What are these savings for? Are they for short term use such as saving to buy a new phone or a new car? Or are your savings for long term use such as for the down payment on a house or for your retirement? Could your savings be for an emergency fund to pay unexpected expenses or monthly expenses such as rent and other expenses in case of a sudden loss of income?
We all have had sudden expenses thrown at us that came out of the blue. There is no way you can predict some of these expenses but guess what…you need to find the money for these expenses and an emergency fund is important for that reason. Sudden loss of income can play havoc on anyone’s lifestyle and losing a job is all too common now-a days so it is wise to prepare for these eventualities.
So let’s say that you are convinced that you will start a savings program immediately. Congratulations!!
But you’re not out of the woods yet.
The mind is not your best financial friend. When you shop carefully and find that great deal at the mall or on-line, the $50 that you saved because of that great sale is no saving at all. Your mind is tricked into believing that you have “saved” $50 because of what economist Richard Thaler calls mental accounting. Spending less is not the same as saving more. You need to actually transfer this $ 50 into a savings account that is identified for a specific purpose. But you say that your bank account is a chequing/savings account and leaving the $50 in this account is the same as transferring it to a savings account. That’s mental accounting. Spending less is not the same as saving more. This $50 reduction in expenses will get spent on something else unless it is transferred into a savings account.
Let’s use another example. You shop around and find a better phone plan…. $50 savings per month.
This $50 reduction in expenses will get spent on something else. If you are serious about starting a personal savings program and really want to start saving money, do yourself a favour and open a savings account and arrange with your bank to automatically transfer $50 each month into this account.
Now you are saving money…not just mental accounting, this is real money. Just watch it grow!!
Money Smarts 4 Kids