I want to start off this blog on savings with a story. Have you heard about the experiments done over many years by psychologists to study the effects of personal self-control? Children were put alone in a room with an experimenter, on camera. The experimenter put a marshmallow in front of the kid and said, “Ok. Now I am going to leave the room. You can eat this marshmallow if you want, but if you wait to eat it until I return, I will give you a second marshmallow too. But if you eat this one before I get back, that’s all you will get.” Then the camera showed all the individual little kids, alone, agonizing over what to do. As you might guess, some gave in and ate the single marshmallow, and others waited a seeming eternity to get a second one (I think the wait was maybe 20 minutes of so, but the kids did not know how long they would have to wait).
The kicker in this experiment is that the psychologists followed up with the kids over many years, and found that the ones who were able to wait for the second marshmallow usually did better in later life. The moral: self-control, which feels like torture sometimes, has its rewards. Saving money is an exercise in self-control. It involves waiting and doing without, but also is something you will most likely be very glad you did.
Saving is much easier to do if you have a clear purpose for doing so. Here are some typical reasons to save.
Why saving is important
A financial cushion in case you enter a rough patch financially, whether through job loss or unexpected expenses. The standard advice financial planners have given since forever is that you should put aside six months worth of expenses. That is not bad advice. Not only will it lessen your panic somewhat if an emergency arises, but it will lessen your daily worry that your finances may take a turn for the worse. Some people like to “live on the edge,” but not many. So putting a little money away for the proverbial rainy day might ease your mind a bit. Think of this kind of savings as akin to shock absorbers on a car.
Save up for something special
Setting aside money for an anticipated big purchase is a pretty good habit to get into. Let’s say you want a big screen TV. If you have a credit card, it is easy as pie to go online and spend $500 you don’t have. Then what? If you pay that off over a year, it will cost you almost $80 in interest to the credit card company, plus the credit card bill will be coming due every month that you must remember to pay to preserve your credit rating. Wouldn’t it be better to get in the habit of making those big screen TV payments before you do the actual purchase? You save $80 in interest, and don’t have to worry if you can “make a monthly payment” one month, because you are paying yourself, not the credit card company.
Saving for investment or retirement may seem too abstract or far off to take seriously, but maybe not. If you are worried about paying for current necessities, then investment and retirement savings may not be a good idea. But if the choice is between retirement savings and over-indulging in impulse purchases, maybe savings would be a good habit to get into. I will not discuss the ins and outs of retirement accounts and investment options right now, except to say that Individual Retirement Accounts (IRAs) are easy to set up through reputable companies such as Vanguard and Fidelity. This money put in an IRA will lower your current tax bill, and can grow to surprisingly large sums over decades. But it is money you usually cannot touch until retirement without paying a hefty penalty.
Gain control of your money
These are the three main reasons to save, but I wish to mention one other, deeper benefit of saving—it gives you a sense of being in control of your money. Even tiny little amounts can have this effect; a dollar a week in a piggy bank, $10 out of every paycheck into a savings account, whatever. It gives you a taste of no longer just reacting to circumstances, but shaping them.
This may seem too small and trivial to make a difference, but maybe not. Getting that taste of taking control of your finances might inspire you to get bigger and bigger tastes, whether through saving, debt reduction, or even wealth creation. I do not want to seem too Pollyanna here. Many setbacks in life can blow things to smithereens. But tilting yourself toward financial self-control also tilts the odds in your favor that you can weather the storms of life.
In the past few blogs we have been considering financial realities where you have some control. We have talked about debt and savings. The one final big area to consider is income. To pay out money or to put some aside, you need to have some coming in. This is a tricky subject, because working in the world is where you are most deeply immersed in life’s uncertainties. Hopefully I can suggest some things to think about as you consider how you go about supporting yourself in life.
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