Saving money is difficult.
Because research indicates we tend to treat our future selves as strangers.
So saving feels a lot like giving money away to a stranger.
I’ve written before about ways to save money.
But here are psychological tricks (Jedi mind tricks if you will) to make following through on saving a little bit easier.
1. Think of future fun. (the carrot)
As long as your savings are going into an investment account and that account increases in value, your savings will compound.
Compound interest is a beautiful thing when it’s working for you.
Here’s a simple example of compound interest at work.
Let’s say you save a $100 and invest it.
And after one year, say your investment has increased 10% in value.
Now your investment is worth $110.
At the end of the next year, say your investment plus last years interest ($110 total) has once again increased 10% in value.
Now your investment is worth $121!
You can imagine how, when this happens year after year, it can seriously add up!
An example that’s closer to home for me is my annual $5500 contribution to my Roth IRA.
If I just stuck $5500 in a checking account every year that didn’t earn any interest, in 40 years I’d have $220,000.
But I don’t do that.
I invest it in the stock market every year.
If I earn an average of 5% annually on my $5500 contribution, I will end up with $697,619 at the end of 40 years – nearly $478,000 more than if I just stuck it in a bank account that didn’t earn any interest!
Taking advantage of compound interest like this is how you retire.
Smarter people than I have figured out that you have financial independence when your investment savings = 25X your annual expenses.
When this happens, you can withdraw 4% from your investment account every year and never touch the principal.
Here’s an article about why and how this math works.
The important thing is the math does work.
So whenever I save a dollar, I know that this dollar is going into an account that can earn me money forever!
This gets me excited because I’m that much closer to true financial independence where I can do whatever I want, whenever I want.
And this is why I think everyone should be excited about saving money – because when you save and invest money, it gets you that much closer to financial freedom!
In short, when you spend a dollar, you’ll never see that dollar again.
When you save and invest a dollar, that dollar can make you money for the rest of your life!
2. Think of the consequences. (the stick)
⅓ of Americans have nothing saved for retirement,
The average 50 year old has $60,000 saved for retirement,
And less than 20% of Americans have more than $200,000 saved for retirement! (source)
But if we remember our retirement equation, you need 25X your annual expenses saved for retirement.
This means almost no one is on track for true financial independence!
Apparently, people aren’t taking financial independence seriously enough.
So let’s remember why exactly we save money.
We don’t save it because it’s a nice thing to do or because other people are doing it, we save money because our lives depend on it.
In other words, if you don’t save money, at the end of your life someone else pay for you to live or you will die.
I’m not trying to be dramatic.
I’m just telling you what’s at stake.
At the end of the day, it’s the money you save and invest that will provide for you when you can no longer actively provide for yourself.
So learning how to save is a daily practice that we need to instill in ourselves as early as possible.
It’s the sum total of our daily financial practices that determine our financial health at retirement.
And remembering this reality every time you’re tempted to break the budget or spend unnecessarily is great way to help you save money.
3. What would your financial guru say?
Some people love Dave Ramsey, others can’t get enough of Ramit Sethi, and I love what Peter Adeney’s all about at mrmoneymustache.com.
Who are these guys?
They’re personal finance gurus with large followings.
Even if you aren’t one of their followers, you probably have someone you look up to for personal finance advice.
Maybe it’s a friend that manages a budget well.
Or a family member who’s right on track for retirement.
Now imagine this person standing next to you next time you’re thinking about breaking your budget or making an impulse buy.
What would they say, or what would they do knowing that you’re making an unwise financial decision?
This is a powerful technique to help you stay on track financially, stick to your savings goals, and avoid unnecessary purchases.
4. Make it a game.
People really like games.
In fact, more people in the US watch the superbowl than vote in the presidential election. (source)
PhD game designer, Jane McGonigal is actually trying to take advantage of this phenomenon to create games that solve the world’s problems.
You too can take advantage of this phenomenon to help you save money and solve your problems.
So how do you turn saving money into a game?
It works best when you play with someone sharing your finances, like a spouse or partner.
You could compete with your partner where whoever goes the longest without purchasing anything besides necessities gets their chores done for a week by the other.
You could also start a coin jar, or give yourself little rewards when you meet savings goals.
There are countless ways to “gamify” your saving process to make it more enjoyable.
But whether it’s a game or not, you should try to find some way to make saving enjoyable.
Because saving money is a lifelong necessity.
5. Up the stakes
Stickk.com is a goal-setting website based on research from Yale behavioral economists indicating people have 3x higher likelihood of achieving their goals when they have incentives (both positive and negative).
This isn’t exactly surprising, but their website is well designed to take advantage of this fact.
On stickk.com, you set any goal you want (losing 10lbs, not smoking a cigarette for the next month, saving one tenth of your paycheck, etc.) along with a referee (a friend or family member – someone you choose – to check in on you and make sure you complete your goal) and/or a financial penalty (such as automatically debiting $X from your account and sending it to a charity you like or dislike) to increase your odds of meeting your goals.
The platform is highly effective and has helped countless people lose weight, quit smoking, and more.
I’ve used stickk.com before and found it effective.
And I’m sure you could use it to help you save more money.
Instead of this post feeling like a downer, I hope it helps you save money and gives you the tools to get on track to financial independence and have more peace of mind!
What Jedi mind-tricks do you use to help you save money?
I’d love to hear about them in the comments.