Do you regularly put money aside in a savings account? Why is it important to save money?
We’re told from a young age that having a savings account is important, but many people don’t have savings because they feel like they don’t make enough money to save. According to Morgan Housel, the author of The Psychology of Money, this way of thinking is incorrect and harmful—everyone should save money even if they don’t have a high income.
Here’s how to start saving money even if you don’t have a high income.
Prioritize Saving Money
Many people don’t save because they think saving is either unnecessary or impossible, or they don’t know how to start saving money.
(Shortform note: A 2019 survey shed further light on why people don’t save: When asked why they didn’t save money, Americans most frequently said they couldn’t afford to save due to their expenses—and if you can’t afford your day-to-day life, you won’t save. To help prioritize saving money, consider reducing your expenses first with strategies like eliminating unnecessary expenses from your life.)
Housel argues that people who avoid saving are wrong for the following reasons:
First, saving is essential to building wealth due to the nature of wealth. As we’ve seen, wealth is the money you don’t use—in other words, it’s the money you save. Therefore, it’s impossible to build wealth unless you save money.
Second, saving is the most reliable way to build wealth because it’s totally in your control. Both of the other methods of building wealth—increasing your income and profiting off your investments—are full of uncertainty: For example, an investment strategy that works today might not work tomorrow depending on how the market goes. Saving money doesn’t involve such risks: You always control how much you save, and saving will be just as effective tomorrow as it is today.
(Shortform note: Not all thought leaders distinguish between saving and investing the way that Housel does. For example, in The Success Principles, Jack Canfield states that you should maximize your savings by investing them so that they can accumulate the maximum compound interest; he never suggests leaving some money in the bank. But by Housel’s definition, your investments don’t necessarily count as savings: If you’re not using them, they might be part of your wealth—but you can’t rely on them because you could lose them at any moment.)
Finally, saving is a comparatively easy way to build wealth. If Kei and Nick have the same net worth but Nick requires half as much as Kei to be happy, Nick can save twice as much as Kei and thus build his wealth twice as fast. This is a far easier task than Nick trying to increase his income or investment returns. (Shortform note: Saving can be so easy you only have to think about it once: Behavioral scientists recommend setting up a system that automatically saves a portion of your income every time you receive any.)
How to Save Money
So how, exactly, can you ensure you save money? Housel recommends that you stop caring about others’ opinions.
Housel suggests that we overspend because we care too much about others’ opinions of us. He posits that there are three different levels of spending: The lowest level covers your necessities, the middle buys you comfort, and the highest allows you to purchase luxurious basics. But once you have enough income to cover the third level, Housel argues, you’re not spending for yourself. Instead, you’re spending for your ego—to prove to others how much money you have.
|How Do You Know When You’re Spending Too Much?|
Housel argues that you should only spend enough to purchase luxurious basics, which are “comfortable, entertaining and enlightening”—but since this is subjective, it’s hard to know when you’re spending too much: you might think an apartment that’s 25 square feet is comfortable for one person, but someone else may disagree. On the one hand, it makes sense that Housel doesn’t define his levels of spending: As we learned in Lesson #1, what’s basic to you isn’t necessarily basic to someone else. On the other hand, his lack of definition makes it difficult to determine when you’ve gone too far: How can you know when you’re spending for your ego? The answer may be to determine what counts as enough, as we saw in Lesson #6. But since Housel states in the introduction that each chapter is meant to stand on its own, this isn’t clear.
By learning to be humble and ignore others’ opinions, you’ll naturally want less. When you want less, you’ll spend less, and you’ll save more.
(Shortform note: How can you learn to ignore others’ opinions? In How to Stop Worrying and Start Living, Dale Carnegie recommends several strategies to help you handle criticism from others, like becoming your own worst critic.)
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- Why the key to financial success lies in understanding human behavior
- How to make better financial decisions
- How chance plays a bigger role in our financial lives than we think