“Saving money is something we can control. It may not be easy…but saving money is possible.”
— Kim D. H. Butler
Many Americans struggle with their saving habits. After all, it is a natural human tendency to spend more as we earn more. Unfortunately, this approach puts us in a perpetual holding pattern, running ever faster to keep from backsliding financially.
Saving, on the other hand, is a progressive action. It is a habit that requires self-discipline to start, but one that pays long-term dividends.
The wealthiest people are often good at earning high incomes and investing money successfully. They understand how to use leverage, manage risk, diversify, and take advantage of tax code incentives. But they also understand the importance of putting first things first. And the foundation of wealth is the habit of saving.
Saving is the Foundation of Wealth
It’s simple: to build wealth, you must first save. The savings habit is what builds and sustains wealth for both individuals and nations.
Saving provides liquidity for both emergencies and opportunities. Saving helps you weather economic downturns or interruptions in income. Saving protects your investments from interruption when cash is needed elsewhere. Saving money allows you to invest in yourself.
Saving is also good for the long-term health of the economy. When people save rather than depend on credit, the economy has greater stability because it is not fueled by spending that ebbs and flows with interest rates and credit standards. An economy fueled by credit is susceptible to economic “bubbles” that can pop later.
How to Improve Your Money Habits
Historically, Americans are rather mediocre savers. According to Trading Economics, our current savings rate is 6.2 percent. For context, in the 1970’s, Americans saved as much as 15 percent or more. Just prior to the Great Recession, savings rates plummeted to lows of less than 3 percent. (The low savings rate and the Great Recession were not unrelated.)
“Habits are the compound interest of self-improvement,” says James Clear in his best-selling book, Atomic Habits. So, how do you improve your savings habits? Clear details how to get better results through smart strategies. Some key insights in the book include:
Goals are not enough. You need excellent habits.
Clear says we don’t rise to the level of our goals—we fall to the level of our systems. Every athlete wants to win. Every investor wants to be profitable. But many struggle and do not achieve success. It’s not the goal that makes the difference—after all, both winners and losers can share the same goals. Successful people have winning habits, strategies and systems to help them reach goals.
Incremental gains make a BIG difference.
Clear describes how British cyclists went from mediocre at best to world leaders in cycling. A mere decade after implementing new systems put in place by performance director Dave Brailsford, the British cycling team had amassed dozens of gold medals, many world records and five Tour de France victories.
What caused the stunning turnaround of British cyclists? Known as “aggregation of marginal gains,” Brailsford’s Philosophy was simple: look for multiple opportunities to make a 1 percent improvement. Which clothing, which bicycle seat, which tire product, massage gel or sleeping pillow could produce a 1 percent improvement?
Seeking out and making many seemingly tiny improvements led to big wins. The lessons are applicable to wealth building as well. Small 1 percent gains can make all the difference.
Whether you are currently saving 2 percent or 20 percent, can you increase that by just 1 percent? If you are earning 1 percent in your savings account, can you find a bank that will pay you 2 percent?
If you already have liquid savings earning 2 percent, can you utilize high cash value whole life insurance to better those returns over time? (Over the long haul, whole life insurance tends to outperform bank savings rates by about 2 percent. And we don’t mean a 2 percent improvement, we mean 200 basis points, which could double—or quadruple—your current savings rate!)
If you have investments earning a predictable rate of return of 4, 5, or 6 percent, can you find a good investment where you could better your return by 1 percent? (This is something Partners for Prosperity might be able to assist you with.)
Make your desired actions “automatic” by making them habitual.
Habits make actions consistent and effortless. You don’t have to think about habits. You don’t have to concentrate on how to brush your teeth or tie your shoes. We do these things subconsciously. In doing so, we bypass our conscious mind and the need for decision-making.
In the same way, excellent financial habits take the effort out of money management.
Habitual tithers do not have to struggle or think about how much they are going to give each month. They set aside their tithe first.
Most wealthy people track their spending as a matter of habit. They may do it themselves or they may have bookkeepers who do the tracking, but either way, they have a system.
Chances are, you have a system for paying taxes. You might pay taxes automatically through a payroll system, or you may own a business and have different systems for paying taxes. But if you don’t have a system for paying taxes, you will soon find yourself in the doghouse!
The savings habit is no different. You must take the guesswork out of it.
Focus on habits and systems, not your current results.
Wealth-building can be achieved systematically. Earn more than you spend. Save first… then invest. Make your savings automatic. Follow rule number one: Don’t lose money. Reduce your taxes. Protect your assets and income from worse-case scenarios.
Building wealth is not rocket science… It’s systematic. And yet, the habits of wealth building may not produce instant or impressive results. That’s why it’s important to build the right foundation through the right habits. Clear says, “You should be far more concerned with your current trajectory than with your current results.”
Recently we revealed the secrets of secret millionaires—everyday working class people who built multi-million dollar fortunes. These people were not high earners or investing savants like Michael Burry of The Big Short fame. They were just humble people who followed a slow, boring, tried and true system for building wealth. They were people who had mastered better savings habits.
To change your habits permanently, you must change your identity as well.
In Atomic Habits, Clear says, “Every action you take is a vote for the type of person you wish to become.” Your actions and your beliefs about who you are become a feedback loop.
Want to run a marathon? Think of yourself as a runner. Want to stop smoking? Think of yourself as a non-smoker, not as a smoker who is “trying to quit.” Want to lose weight? Ask yourself, “What would a healthy person do?” Then take the actions consistent with that identity.
Similarly, if you want to build wealth, you must take on the identity of a wealthy person. Even if your bank account does not currently reflect that reality, you must start to think of yourself as a saver and an investor. You can identify yourself as a “millionaire (or multi-millionaire) in the making” and adopt habits consistent with that identity.
7 Strategies for Better Savings Habits
“Habits are the compound interest of self-improvement.”
So what ARE the habits of excellent savers? Here are seven you can adopt now:
#1: Track what you’re spending.
Establish a baseline by tracking your spending for a few months. Once you know where your money is going, you can determine where you can afford to adjust your spending.
#2: Pay yourself first.
Rather than saving what is left over at the end of the month, savers prioritize savings. The simplest, most effective way to “budget” is to save first, then spend the rest!
#3: Align your spending with your priorities.
Are you spending more at Starbucks than on your future financial freedom? Does your bank account reveal what’s really important to you? Look to see where your values are – or aren’t – represented by your bank statements.
#4: Focus on adding positive habits, not deprivation.
Add home-cooked meals with friends (instead of eating out). Add family movie nights at home (instead of dropping $80 on a theatre and snacks). Add a garden or another hobby that can help you grow, make or create what you used to buy!
#5: Make saving automatic.
Savers have systems in place that move money into savings accounts, life insurance policies, and investments. Set up automatic withdrawals and transfers so that money doesn’t sit in your checking account.
#6: Out of sight, out of mind.
Consider opening a savings account at a separate bank or credit union, or beginning a cash value insurance policy so that you have liquidity without making access to your cash too easy.
#7: Owners are savers.
As we detailed in “A Home Buyer’s Guide for Wealth Builders,” owning your home and investing in real estate can be two of the most important decisions you’ll ever make. Rather than spending decades throwing money into a never ending black hole of rent, you can use mortgages and even rental income to build leveraged wealth. (For more on this, read my latest book with Jimmy Vreeland, Busting the Real Estate Investing Lies.)
Owning whole life insurance is another simple strategy for better savings habits. There’s a saying, “Life insurance is like a savings account that shows up like a bill!”
A Better Way to Save
Dave Brailsford, the British cycling coach, says, “You can walk 1,000 miles, but you can only do it a step at a time.”
Saving money happens one dollar at a time.
Savings accounts at a bank or credit union are a good place to start. As your liquidity grows, you’ll want to consider other options.
For better long-term savings rates combined with additional benefits, the wealthy often utilize high cash value whole life insurance. Find out how it can help you:
- Beat bank rates.
- Increase long-term savings and financial certainty.
- Protect your family permanently (why get only term insurance that becomes cost-prohibitive when you need it most?)
- Grow money tax-deferred and pass it to heirs tax-free.
- Shield your privacy (the IRS won’t know what you have stashed away).
- Build liquidity that can be used or borrowed against for any reason.
There are pros and cons to whole life insurance. For instance, the premiums are substantially higher than term insurance, and cash value takes time to grow. Convertible term or a blend of term and whole life may be preferable in some circumstances.
For a life insurance quote in the form of an illustration, contact Partners for Prosperity today. We’d love to help you improve your savings habits!