‘Save first, spend what’s left.’ This is great advice. It’s also the opposite to what most people do, which is ‘spend first, save what’s left.’
The second strategy has an obvious problem: what happens if there is nothing left after spending?
The answer, of course, is that nothing gets saved. And if nothing gets saved, nothing of any value gets bought. No home, no decent holiday, no seed money for your own business (the best way to become wealthy, by the way).
Which is why financially successful people save first, and spend what’s left. The good news is that modern technology gives us all a very easy way to do just that. We call this strategy ‘set and forget.’ It is nothing more sophisticated – and nothing more difficult – than setting up a system of bank accounts and direct debits. And then forgetting about them.
First you need to set up a few accounts. NO fee accounts are always the best. One will be for your bills, one for your savings and one for your daily spending (you can add more if you want to have an account for things like trips, cars etc). How long did that take? Half an hour? Now, sit back and have a drink... its time to get this working.
Direct debit is a really convenient way of ensuring you pay all your essential bills. When you organise for bills to be paid by direct debit, all you have to do is make sure you have enough money in your account on the day the payment is due. To make this less of a challenge, we have an account that is dedicated to your bills. All you need to know is what is coming out and transfer that amount in the day after pay day. This gives you much less time to go spending before the bills are due.
(There is one word of warning when it comes to direct debit: make sure you actually check the bills that you are paying each month. You want to make sure prices have not risen without you realising, and that you are only being charged what you actually wanted. Hello, mobile phone company…)
The ‘trick’ then becomes to treat your savings plan like a normal bill that has to be paid regularly. A direct debit that has to be made each payday. Rent? Tick. Phone? Tick. Savings? Tick.
Let’s say you arrange for an extra $200 to be transferred each fortnight into a savings account that is hard to access (or, at least, that is hard to access at 1am on Sunday morning). By the end of the year, you would have saved $5,200 plus any interest that you might be able to pick up. All you have to do is keep getting paid and the saving occurs automatically. You set, and then forget.
Now we have your bills paid, your savings set, how about some spending money for the bottle of vino on a Friday night? Done. That last account (well if you set up three) is you daily spending account. This is where the day to day living expenses come from. Think shopping, vino and those Friday drinks that end up going on until you....we you get the idea. This should be the only account that is easy to get to. The only one with an ATM card. And this is the one that you need to watch, cause once its gone, its gone!
The next step is also a simple one: make your savings hard to spend. This basically means making them hard to get to. A simple way to do this is to create a dedicated savings account with another bank. If you bank with the NAB, get a savings account with Westpac. If you bank with Westpac, get a savings account with the ANZ. Make this your one and only account with that bank. Go for the highest interest-earning account you can get (this will depend on how much you already have saved).
Then – and this is really important – get rid of any plastic card that comes attached to the new account. Make the money in that account hard to spend. Make it so that you have to transfer the money somewhere else before you can spend it. This will means transferring money from one bank to another, which usually takes at least 24 hours. Bye bye impulse spending.
Some people take the idea a step further and don’t even set up internet and phone banking for the new savings account. The only way to get money out of this kind of account is to physically go into a branch during business hours. And branches are not open on weekends. Certainly not at 1am every Sunday morning.
This is just one way to go about forcing yourself to save. There are various others. But they all have one thing in common: you have to automate the saving – and then make it hard to access those savings.
That is the simplest way to save first, and only spend what’s left. Save without thinking.