About two months ago I ran into a good friend from college, who I probably hadn’t seen for almost a year. Even though it had been such a long time, the second thing out of his mouth was “Dude, I am so broke.” It was kind of a weird thing to say to someone who you hadn’t seen for so long, but I could tell it was bothering him. Long story short, we talked a bit about his finances and I came to a conclusion in my head: he was over spending.
I’m sure he probably makes good money and I often see this problem amongst my peers, which I will define as early 20-somethings who are slowly adjusting to the working world. I have a made up theory that the majority of fresh college grads will all of a sudden think that they are big ballers the minute after they land their first decent salary job. This typically results in overspending, which is actually understandable. If you were comfortable living off of a certain monthly budget while you were in school, and now you are getting paid maybe triple or even quadruple that monthly budget, then why wouldn’t you be able to dramatically increase your spending?
The problem is that most new college grads account for the income jump but not for the increase in their necessary expenses. Now that they are financially independent from mom and dad, they probably have to start paying for a lot more shit than before. They now have to pay for their own rent, utilities, phone bill, cable bill, car loan, car insurance, student loan, and the list goes on. They also probably don’t account for the cost of health insurance and income tax. You always see some noob complaining about taxes on their Facebook status after receiving their first paycheck. Anyways, the worst part of it is, fresh college grads also usually don’t budget for saving.
Let’s be honest; people my age, myself included, suck balls at saving. The reason behind that is probably because we most likely never really practiced saving money our whole lives. Yes, you probably had some money saved up in the bank during high school, but that money was most likely gifted to you from family over the years. Or maybe you worked part time in school and saved up yourself, but it’s not like you were responsible for paying for anything else back then. It’s more than likely that our parents just worked and worked, while we just spent and spent.
So yes, saving sucks and we suck at it, however, I have developed a few strategies to make saving a little easier. The way I see it, saving money is all about self control. Unfortunately, I have zero self control, so I try to make the process as automated as possible.
Note: I know next to nothing about investing. I just do what I think makes the most sense for me and requires the least work/heartache.
So first off, 401k. You probably already know. Put a little in there, especially if your company matches. People might tell you that you can make higher returns somewhere else, but honestly, you would more than likely just end up blowing that money instead of investing it anyways. You might as well save it before you even see it. Plus, it reduces your taxable income.
Next, have your paycheck directly deposited into two separate banks; one to spend and one to save. For example, I have the majority of my paycheck go to my #1 checkings (my main bank), while I have a smaller portion of my paycheck go to my #2 checkings (bank I don’t use). I want them at different banks because that makes it more difficult to transfer money between the two accounts. I only use the money in the #1 checkings and never touch the #2 checkings. The #2 account just accumulates money without me doing any work or even thinking about it.
I used to have my checkings automatically transfer money to my savings every month, however, once again, my willpower is weak and it was too easy to just transfer that money back and spend it.
Next, automate your investment accounts. I set it up so that my Roth IRA automatically withdraws money from my #1 checkings the day after pay day. I do this because if I had to manually put money away that I won’t see until I am 65 every month, I probably would never do it. This makes it so that I don’t have to even think about it.
Next, try to save above and beyond. I try to determine how much additional money I can save each month and transfer it to my savings account. As nerdy as this sounds, I think of this as “paying myself”. I try to think, “Hm.. instead of blowing this cash on something stupid, I will just give it to myself.” It kind of makes me feel better about it.
Additional steps: Set all of your credit card bills to be due on the same day so it’s easier to keep track of them. You can do this by calling your credit card company and just asking them. I like to set it so that is due 1-2 days after payday. This will ensure that I will always have enough to pay it off. You can read more about how credit card interest works here.
Also, find a website where you can aggregate all of your financial accounts. A lot of people use Mint.com, but I find it kind of glitchy and my information is not always accurate or up to date. A lot of people don’t know that most bank websites actually allow you to link all sorts of accounts into your portfolio and it is probably more secure. It allows you to see all your finances up to date and at one place.
Lastly, spend an hour or so a month to figure out exactly how much you spent that month, and what you spent it on. This will help you be more realistic with your budgeting and saving. Also it may help curb bad spending habits. Generally I do this by exporting CSV files from my credit card websites and aggregating them in Excel.
As you can see, the main theme behind automatic savings is to save your money before you even see it. Don’t even give yourself a chance to spend that cash. Also, it’s a lot less work; all you have to do is sit back, relax, and save.