Every two weeks, you collect a paycheck. But, despite your best efforts, it often seems to disappear before payday rolls around again. Where on Earth does it all go? Why is it so hard to save money these days?
You’re not the only one asking this question. According to MarketWatch, 23% of those making $150,000 per year had less than $1,000 in savings. It's a hard stat to wrap your mind around, until you realize the average American saves less than 6% of their income.
We’ve come up with a multitude of reasons why it’s hard to save money. Some are legitimate, while others are rationalizations for terrible financial habits. We’ll examine each one-by-one, and help you overcome them.
Let’s get started.
1. You Have Poor Money Habits
We live in an ever-changing world. An economy that booms one year can contract into a recession the next. Through it all, however, one thing remains constant – our choices.
Often, they seem inconsequential – you don’t feel like cooking, so you eat out. If left unexamined over time, though, these choices can strengthen into habits. When you make dozens of similar financial decisions, it isn’t long before you end up in a deficit. It’s tough to save when you spend more than you earn.
Worse yet, many use credit to pay for things you can’t afford. Why spend weeks or months to save up for a trip or a gadget when you could have it now? It’s quick, it’s painless – and you can have it all for one “low” monthly minimum payment.
Of course, if you do this for years, eventually, that bill won’t be so low. How can you save when you spend the equivalent of a car payment per month in interest charges? You can’t.
To avoid the trap of poor financial decision making, question yourself each time you reach for your wallet. Do I really need what I’m about to buy? Can I get it cheaper elsewhere? Why am I charging this when I can’t afford to buy it outright?
Often, we purchase things to make ourselves feel better. By replacing mindless consumerism with cheap/free alternatives, you can significantly minimize expenses. For example, instead of ordering pizzas every weekend, try making them yourself. Have a picnic in the park instead of dining out. The possibilities are endless!
2. You Blame Everything/Everyone But Yourself
Most financial problems in our lives stem from the choices we make. Yet, most people find a way to pin the blame on external factors. It’s the government’s fault because they tax us six ways to Sunday. It’s their employer’s fault because they didn’t give out the raises they usually do. It’s the economy’s fault for slipping into a recession.
We have limited/no control over these actors. But, by blaming them, we shift the heat away from the one area we do control – ourselves. Change is scary, so we find ways to avoid going through with it.
When we accept responsibility for the outcomes in our lives, though, results often follow quickly. Can you find a way to save $1 per week? Unless you’re in genuine financial trouble, you probably can. Double that to $2 the next week, then $5 the next, and so forth.
Once you stop making excuses and start exercising your saving muscles, you’ll be shocked at how easy saving can be. Want to get started? Set up a jar or glass and toss your pocket change into it each day. Success begets success.
3. You Don’t Track Your Spending
Tossing spare change into a jar can be an empowering habit. However, you’ll still lose money if you aren’t conscious of how much you spend. In the era of tap-and-go payments, you can easily spend over $100 per day without realizing it.
Do you know people who complain about not knowing where their paycheck went? Chances are good they don’t think twice about how much their nights out cost. When they want that new gadget, they quickly forget about the price five minutes after buying it.
If you want to become a saver, you need to know your enemy – reckless consumption. By tracking your spending every day by using free apps like Personal Capital, you’ll learn where you spend the most money. Once you are aware of your biggest leaks, you can significantly reduce your outgo.
Knowledge is power.
4. You Pay International Money Transfer Fees That Are Too Steep
We live increasingly international lives. For instance, you might have a child attending college abroad. Your business may have hired employees in the Philippines. Or, you may be in the process of buying a vacation home in Costa Rica.
In all three cases, you probably have already transferred significant amounts of capital overseas. So, what’s the problem? Aren't these expenditures investments? Isn't it true that, for the most part, education, business, and real estate spending has a positive ROI?
Here’s the issue – if you’re moving cash through your bank, you’re spending way too much on transfers. Period. We’re not talking JUST about wire fees. Yes, these charges are egregious – in some cases, they can cost as much as $45 for an international transfer.
However, that isn’t where financial institutions make the bulk of their profit. You'll find that in their exchange rate margin, which is the difference between their price and the interbank rate. The interbank rate is the ACTUAL rate of exchange. Brokers use that price to trade amongst each other.
To maximize revenue, banks bake a hidden profit margin into the rate they charge you. Often, their price can vary by as much as 3% to 5% off interbank.
How much money are you losing out on? Let’s run a quick example. Let’s say you have to transfer 10,000 GBP to the UK to pay your daughter’s tuition. At present, Bank of America is offering a USD/GBP rate of 0.776514. To pay off your daughter’s 10,000 GBP bill, you would have to move 12,924 USD, less BoA’s international transfer fee of 45 USD.
Now, let’s compare money transfer services like Transferwise. Transferwise is famous for offering the interbank rate on exchanges. Accordingly, they charge a USD/GBP rate of 0.800673. To make money, Transferwise charges a nominal transfer fee. In this instance, it’s 0.8%. Given the math, you would have to send 12,591 USD – more than 300 USD less.
And that’s just one transfer. If you, for example, run an international business, you likely make regular overseas payments to vendors/employees. You may accept payments from customers in a variety of foreign currencies. Let’s say you pay 10,000 GBP per month to suppliers in the UK. According to the math we laid out above, those losses will add up significantly over time.
Few people can accurately predict what the economy will be doing from year-to-year. Given how thin margins can be, a leak like this could mean the difference between your business surviving or failing.
5. You Don’t Have A Budget
Tracking spending is only half the battle. You also need to make allowances for discretionary expenditures. If you don’t they will inevitably exceed your income when willpower fails. On top of that, you should also be automatically saving a set amount of money per month.
You can only achieve these goals by committing to a monthly budget. Start by defining your fixed expenses. Take note of things like rent/mortgage, bill payments, and your average weekly spend on groceries. Once you do this, you’ll arrive at a baseline number – the amount you need to survive month-to-month.
At this point, carve out the amount you plan to save each month. Let’s say you earn $4,000/month after taxes. After accounting for fixed expenses, you have $1,500 left. Ideally, you should aim to save 10% of your income – in this case, $400. After accounting for that, this deduction will leave you with $1,100 per month for discretionary spending.
If you are carrying a credit card balance of $10,000, you can make it vanish in little more than two years. If you want to go on a $2,000 all-inclusive vacation, you’ll be able to pay for it in less than six months. Want to speed up those timetables? Decrease your discretionary spending and bank the difference.
Once you have a plan (or budget) in place, you can make your dreams come true. For example, did you know you can basically lower your monthly cable or internet bill? Here's a great example of how to lower your Spectrum bill, which can apply to most other providers.
6. You Don’t Have An Emergency Fund
Most of us live life on the edge. Before 2020, almost half of Americans couldn’t handle a sudden $400 expense. In more recent times, many more of our neighbors are now vulnerable.
You need an emergency fund. Make this a priority – before you begin paying off your debt, investing, or saving up for that trip, set aside at least $1,000. This amount will insulate you from many common surprises, like broken appliances or car troubles.
Once you’ve socked that away, increase the size of your emergency fund to at least six months of fixed expenses. In the previous section, our fixed costs amounted to $2,500 per month. That means you'll eventually want your emergency fund to be worth at least $12,500.
That way, when “black swan” events happen, they won’t plunge you into an immediate crisis.
7. Your Area’s Cost Of Living Is Extremely High
Sometimes, you aren’t making excuses – the cost of living really is that high. Many cities are notoriously pricey – for instance, living in San Francisco will take a HUGE chomp out of your wallet.
According to Curbed, the average rent in San Francisco stood at $3,520/month in 2018. While salaries at most Bay Area firms are high, not everyone is so fortunate. For example, the median monthly compensation is $8,508 at Intel, $5,852 at PayPal, and $4,568 at Tesla.
Given these figures, someone earning a median salary at Intel would pay 41.3% of their income in rent. A PayPal employee would fork over 60.2%. And a Tesla worker? They would surrender a whopping 77% of their hard-earned money to their landlord. For reference, experts recommend spending no more than 30% of your income for shelter.
But, even here, you have recourse. Sometimes, you have to make peace with the fact that some places are out of your reach. If you work for Tesla, you should take a serious look at Vallejo, where rents average $1,380 per month.
Alternatively, you could take on roommates. Before you groan, hear us out. Yes, there are bad apples out there. But, if you screen people thoroughly, it’s easy to end up with a respectful, responsible housemate. Heck, you might even end up liking them!
8. You Don’t Earn Enough Income
Earlier this year, before all hell broke loose, unemployment was at multi-decade lows. The stock market was hitting record highs. But, even then, wages and salaries weren’t doing so hot. According to Salon, they only grew by 2.7% in 2018, and just 1% in 2019.
Do you struggle to save despite slashing your budget to the bone? Try improving your income. It all starts by understanding the economics behind compensation. The amount your employer pays you is a function of the demand for your skills, and the availability of labor. Education is helpful, but if there’s a surplus of people who have your skill set, you’ll struggle to make money.
So, how do we fix this? It may mean retraining in a field where demand is high, and the availability of labor is low. Or you could start a side hustle that solves an unaddressed problem. Either way, you’ll inevitably save more than trying to squeeze blood out of a stone (i.e., your current situation.)
9. You Don’t Have Defined Long-Term Goals
When you don’t have a long-term goal to shoot for, it’s tough to motivate yourself to save. If you aren’t saving for things like an emergency fund, a home down-payment, or early retirement, distractions will fill the void.
Last-minute trips, brunch dates, and nights out at the bar all fit this description. They are currents in the ocean, pulling your rudderless ship adrift. When you have a plan, though, you can overcome these unplanned detours.
When you know where you’re going, you take action to get there. These include cutting back on unnecessary expenses and increasing your income. It means replacing old habits with those which cost you less financially – all while maintaining your social life.
In turn, your freed up capital goes towards the big, hairy, audacious goals you’ve set. When the destination inspires, it becomes much easier to perspire.
You Can Do Better
None of the topics broached in this article are meant to belittle. Many of us are stuck between a rock and a hard place. However, most underestimate the personal power they possess. By making some emotionally difficult but monumental decisions, you CAN change the course of your life.
Start small and go from there. You too can make it happen.
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