After a long busy weekend of moving to my house, I am back on the internet! I previously told my story so far. I am going to elaborate on my system for saving money.
My system for savings
I have been reading a lot about Systems vs Goals lately. I first read about systems in How to Fail at Almost Everything and Still Win Big, written by Scott Adams. This book is about his many failures and what he did that eventually lead to his successes. Basically, it boils down to setting up a series of steps that will eventually lead you to a better state. I try not to use the word “goal” because once a goal is reached you are done. A good system will enable you to keep on advancing. A system can be used to achieve goals, but the goal is almost incidental. If that makes sense.
Spend less than you earn
The first thing that you will read in pretty much any financial independence book is to spend less than you earn. This is what I have done since I left school. In college I lived on what I had, which was just enough to pay bills and pay for necessities. I had a little extra, but not much. I don’t know how I did it, but the day I graduated college my bank account hit zero.
When I began working, I started to spend more. I was able to do more and it happened, but I still spent less than what I earned.
Pay yourself first
My salary was larger than any amount of money I had earned before. I started contributing to my 401k as soon as I began working. This money never hit my bank account, so I never got used to having it. I was saving money and it took me about 5 minutes to set up. Effortless savings. If your employer matches, that is free money.
My direct deposit hits multiple accounts. I send money to my spending and various savings accounts. When I get a bonus or work some overtime, I have designated my investment account for those deposits. This account basically takes the remainder of the paycheck after each of the other accounts are funded.
Avoid lifestyle inflation
Lifestyle inflation is where you spend more as your income rises. This is pretty easy to do without even thinking about it. My system doesn’t allow this to happen, because when I get a raise my investment (overflow) account gets a larger deposit. The amount going into my spending account is fixed.
Tracking what you spend
I don’t exactly track what I spend because I have an account that is for spending. I am allowed to spend every dollar in that account. This includes all my bills (car maintenance, cell, etc), food and anything else I want spend money on. The money I don’t spend will go into a “to be spent” fund. At the end of the year, it is easy to see how much I spent (i.e. total deposits – “to be spent” balance).
My goal is to keep this account to exactly what I spend. I do not want the “to be spent” account to be overly full (usually just for plane tickets or if I want something and have to save up over a few checks). Periodically, I will reduce the amount of money going into the spending account if I do not spend it all. My spending has gone down over the last few years because I have everything that I want.
I have tried more complicated ways to track spending, but I usually only analyze how I have spent if I spend more than I was expecting.
Reduce fixed costs
What? You just said you don’t track your spending! I don’t, but I absolutely hate paying for things that I do not like. I have an IPhone 3GS from 2009, I like the phone but hated the contract. For years I looked for a service that met my needs, would let me use my current phone and was cheap. I finally found a post on Mr. Money Mustache that talked about a company called Airvoice Wireless. If you only text/call then check out that link.
I view the phone as a necessity. I rarely do anything but make calls on it (I play games/listen to music on planes only). Cable TV was another thing I could do without and cut the cord more than two years ago. These changes saved me over $100 dollars a month, which enabled me to reduce my spending money (which automatically increased savings).
Forced withdrawals from savings
I love saving money, so how could I spend more money if I wanted to? Well, I would be forced to remove money from my investment account. This is an act I would have to do deliberately and feel the pain of seeing my available cash drop.
The other option is to change how much is going into that account. This can be easily done in a minute, but then I would have to sit and wait longer to make my next investment.
This system works for me. After setup, it requires very little to continue. I feel good when I save and not as good when I spend. It took a little tweaking but overtime I was able to simplify it.
What is your money saving system?