Did you know that you are horrible at saving money? So, you have $5300 in your account and you think that’s a lot? Wait until your car breaks down. It’s time to change the game. How do you do that?
Break it down and build again
What are your saving goals for this year? Is it $7000? $8000, or $9000? Let’s say, your saving goal is $9000 this year, and this might seem like a scary number, but, don’t think about this number. Instead think about 2466, by looking at your spending and budget, and see if you could squeeze out, $24.66 every day. By the end of the year, you will have $9000 and you just won the battle of your saving goals.
What you might not realize is that your most vices could be costing you hundreds of dollars every week. Those vices don’t have to be cigarettes and drinking, it could be Netflix, Uber, unlimited data plans, etc. And the whole reason is that you tend to put more value on present trade-offs than long-term goals.
To hack your brain, after, breaking your goals down into small pieces, instead of thinking of the daily savings of $24.66, think of it as though you are saving $9000. When your mind is focused on this bigger number, you will be able to fight off the urge to commit certain vices. Of course, it’s easier said, than done, and everyone struggles to keep their impulses out of control. What if you knew the secret to impulse control, would you take it?
Like everyone else, it speaks volumes, that each one of us can resist everything except temptation. And the reason you are giving in to these impulses is as a result of something called Dopamine.
The funniest thing about Dopamine is that you don’t experience it anymore after the purchase is made. You sort of forget about that item you bought after a few days. Therefore, you are getting dopamine from the anticipation of buying that item not when you buy it.
In reality, companies understand this feeling, and they have found various ways to use these hidden vices against all of us, including you. They give sales cuts, and thresholds, that make you feel, you are saving money, while you end up spending more.
Now, how do you get yourself out of the bondage of your dopamine? Whenever you feel the need to buy something, wait, for an extra two weeks. And then buy it, if, by the end of 14 days, you still want to buy it. 99.9% of the time, you will discover, you didn’t want that stuff, it was basically, an impulse.
There is a psychological thing in your mind that is called Loss aversion and it makes saving so difficult for you. This is the tendency to feel negative whenever you perceive you are losing money. You will often experience it when you take a piece of junk money and put it into your savings account. Even though that money is still yours, you still feel like you have are losing it.
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This is why your saving goals should be automatic, and because it’s automatic, you won’t even notice that it’s gone. It’s not a bad idea as you do not have to lift a finger after you’ve done it once. You should think about this as a self-tax taken from you by your future self just so he can become financially free.
Would you like cash with that?
At that moment when you see a new gadget and you want to buy it, because it will save you two seconds to open up your app. Pause and ask yourself, instead of spending $1000 to save you two seconds on this new iPad. Would you rather be given$1000?. This is the moment you’ll realize it’s more important to you to have the cash on hand. And if you still want the iPad, remind yourself of strategy 2 as we discussed above.
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Now, you can look through your room, and try to figure out, how many of those belongings of yours would you rather have cash for. You’ll see the clear relationship between money and value whenever you try this exercise.
The truth about the value
You can level up your understanding about money and value with this question, “how much time is something worth”? Let’s say, you wanted to buy the latest device for $1000. You should think about how many hours you need to work to buy that phone.
If you have an income of $67000 and then you divide it 2080h(working hours), this means you get paid, an average of $32/h. This means you will need 31 hours to be able to afford that new phone or about 4 full working days. Knowing this, is it still worth it? It might not be the best feeling in the world to think about your time and your money in this way, but, it’s the cold truth.
The future value formula
This formula is used to calculate the future of your money based on inputs like interest rates, deposit amounts, compounding periods, etc. Think of it in this way, if someone said, they would give you $100 today or $100 next year, which would you rather take? You did choose the $100 today because you can do something with it. However, we would say, the $100 today is worth more than the one for next week and next year too. This is the basic idea behind interest rates. If the above description around the $100 is true, try to figure out how much less is the $100 worth in a week and a year.
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The future value comes into this scenario if you are asked to take a $100 today, or $105 in a year, because, you’ll have to think about the extra $5. Therefore, if you could have an account that pays an annual 10% on a $100, then, you should take the $100 now because of its future value which will be $110. If you cannot beat the 5% interest in a year though, then, you should accept the $105 in a year. Since $105 will be higher than the present value of $100. The big question is, is your beautiful gadget worth the value of your future money?
There’s more to life than just saving, and that’s celebrating. The big picture of saving and accumulating three trillion dollars before your 40th birthday is looming around you. It’s important to appreciate the little wins or mini-goals along the way. You tend to focus too much on how far away you are from your goals instead of focusing on how much closer you’ve got. And this is important because psychologically you have a self-reinforcing nature. Your brain is programmed to respond positively to rewards, and small wins because it releases dopamine which makes you happy. The extra spark of happiness will motivate you to keep trucking along, without giving up, and keep looking forward to the next saving milestones.
Take out a ruler
Peter Drucker had said if you can’t measure it, them, the, you can’t manage it, and yes, you can’t do because you have no idea, how much, you spent last month. Tracking expenses doesn’t have to be boring, because doing it is essential to help you take cognizant of your spending habits.
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This will help you optimize your spending and savings. The best part about this is that you’ll reconsider each new purchase before you make them, and makes you motivated to save.
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You might be thinking that savings equal your income minus expenses but that’s wrong, it’s actually, your income minus your ego. Look around you, how many things did you buy that came from your ego, it’s a lot, right? Ego about your money has been seen to be spending beyond the minimum need of materialism. It’s just a way to show people that you have or had money.
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Therefore, the quickest way to save money isn’t about increasing your income, it’s about increasing your humility. You can spend less if you desire less and you will desire less if you cared less about what others think of you.
As it stands, you do not need a specific reason to save money, you can do it for saving sake. It gives you the options and flexibility to wait till you have the cushion and to pound it when you see an opportunity. By being able to save, you have more control over your time and options.
If you are only focused on saving money, then, it won’t end well for you. That’s because every minute you save, inflation is eating away at what you work hard for. It’s only going to get worse, that’s why you learn the secret strategy to profit, even though the market crashes.