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This is a guest post by Sara Williams of Debt Camel, a website which covers everything about debt, from payday loans to mortgages. Sara want to share with you a key way to increase your savings; simply to pay yourself first.
Do you really want to save some serious money over the next year or two or ten? I don’t mean, “Well it would be lovely to have lots of money in the bank” – that’s just a day-dream. I mean having a definite goal that is so important you are happy to change some of your life so you achieve it.
Have you got a big target?
For many people in their 20s and 30s that is getting a deposit so they can buy a house. But you may want to be able to save enough so you can take several years off work when you start a family. Or change to a less well paid but more interesting career. Or be able to go part-time and indulge your hobbies in your 50s.
Whatever it is, money saved gives you freedom and options. But you have to have a plan to save a large amount. Your salary may look fine on paper, but even when you make some good spending decisions in a month, all too often there doesn’t seem to be as much left at the end to save as you expect.
The answer – “pay yourself first”
You pay yourself first by setting up a standing order to move the amount you want to save into a savings account on the day you get paid.
By doing this you are deciding that the most important thing is your decision to save. You are making what you want to do with your life your priority, rather than let the money dribble away on small things through the month. You are choosing to pay yourself – or rather your future self – instead.
Why does this work so well?
Here are five psychological reasons why it’s much easier than being frugal during the month and saving at the end:
You only have to make one decision. Once you have decided how much to put aside, you don’t need to worry about it any more. This replaces having to think “shall I spend or save” multiple times a week. It’s a lot of mental effort to try to weigh up a short term gain against a long term goal. Pay yourself first is just easier and less stressful.
Simpler budgeting. By removing the money at the beginning, you know exactly what is left. It’s also a neat way to get used to living on a lower income if that is one of your goals.
You enjoy spending money more. This may sound odd, as obviously you have less money to spend… But at the moment you keep having to think about saving and as a result you can end up feeling guilty if you pay for something that is in your budget. An example: it gets very wearing having to think when you are looking for some new work clothes whether you should get the dress that is £25 cheaper so you can put an extra £25 into your house deposit. The house seems a long way off but that dress is in your hands… But when you have already met the month’s saving target, you can spend the larger amount on a dress if you have the money.
You have changed the default from spend to save. Before it was normal to spend, now it’s normal to save. So you have to take an active step to withdraw savings and spend them – to opt out of the savings path you have chosen. You still have access to your money for a big problem with the car or if you need to fly to a family funeral, but you aren’t likely to dip in to fund those little discretionary expenses that can add up to such a lot. Before it was hard to be thrifty, now it’s a habit to save.
You can see how well this is going. Before, each month reinforced the idea that you weren’t good at saving. Now most months become successes and you have your growing savings account as evidence that you can do this. It is very satisfying to know that you are taking control of your money and your future.
Do some of those feel right for you?
How much to save
That is the million dollar question. Too much and you will just be taking money back out all the time, which spoils the whole point. Too little and your goal gets further away.
I suggest going for something not over ambitious at the start. Don’t set yourself up to fail. You could then revise this after three months say.
Another option is to keep the “pay yourself first” at a very manageable level and also sign up to an automated savings app that quietly takes small amounts out of your account several times a month when it thinks you don’t need them. I’ve reviewed a couple here 2 apps that make it painless to save. I’ve tried them both and I think they work well! Team one of them up with a standing order to save on your payday and this could be a great combination.
If you’ve enjoyed this, have a read about Broken Windows Theory. See if this is something your home suffers from and if it could save you money too.