Today’s savings account rates getting you down? Don’t let the economy discourage you from reaching your savings goals. Try these money saving tips, rules and formulas to motivate yourself into saving more!
I recently caught an ABC News video which featured a fellow whom I’ve seen actively participating in the financial blogosphere. Rob Bennett is a personal finance enthusiast and writer who was interviewed by ABC News’ Money Matters. You’ll find many saving and investing topics and discussions in Rob’s blog and a book he’s written (called Passion Saving). Rob was on the video to discuss some tips from his book.
I like Rob’s fresh views and tips on the subject of saving, some of which I’m sure I’ve been subconsciously employing myself. These Unconventional Money Saving Tips are powerful strategies that can help you change how you think about saving. Here is Rob in action, talking about these tips. If you’re so inclined, you can check out a clip of the show where he appears.
Unconventional Money Saving Tips From An Expert Money Saver
While there are 10 such tips that Rob has expounded upon on his site called Passion Saving, I’ve chosen to highlight those that were mentioned in the video:
1. Set a savings goal of a $100,000 and focus on getting over this “hump”.
I like the idea of visualizing your goals and creating savings milestones for yourself using hard numbers. The idea here is to have a target that you can see yourself achieving. Your target doesn’t have to be $100,000; if this number seems too gargantuan, try a lower number — a nice round one like $10,000. The important thing is to get started. Also, the more you save and get over the “hump”, the easier it should get.
2. Find out the true cost of any purchase.
We’re often beset by tools of convenience like credit cards, which are geared to separate us from our money; cash back credit cards make spending so much more pleasant with all their promised rewards, after all. So if you’re committed to cutting back your spending, make the spending process more painful by tallying up the true costs of those purchases you make. Once you determine the true price of a particular item, it may be just the thing to discourage you from buying it. In particular, include income tax when figuring out how much something costs.
You can do this by taking the price of something you’d like to buy, then adding not just the sales tax, but the associated income tax that comes with earning the money required to afford that particular item. Now if you decide to put this purchase on your credit card, just imagine how much this will ultimately cost you in interest over the years! Hopefully this is enough to scare you out of making impulsive shopping decisions.
Example: You want to buy a nice camera that’s priced at $250. Now add the sales tax, say $23. Then figure out just how much money you’d have to make to afford that camera. The real answer is roughly $330 before income tax is taken away. Remember that you pay for stuff in after tax dollars!
A corollary to this rule? Know the maintenance costs of things you buy (e.g. a car or a home). They all add up!
3. Determine how to finance the stuff you spend on, for life.
Rob describes this as the most powerful of his 10 rules: it’s called the multiply by 25 rule. How does this formula work?
Take a look at each spending category in your budget. For each one, determine its cost for an entire year, then multiply it by 25.
That resulting amount, when saved up, will throw off enough income to support your spending on that item for life (e.g. indefinitely), assuming a 4% annual real return on your savings. The “magic” here is that by using this rule, you’ll figure out what it takes to fund something for life. Once you’ve saved up for something in this manner, it can be quite liberating to realize that you’ll never have to worry about affording that particular budget (spending) category ever again.
Example: If your travel budget is $2,000 a year, then you’ll need $50,000 today to finance your annual traveling expeditions for life (provided you put your $50K in a solid high interest savings account or equivalent).
Caveat: Today’s low savings account rates are tough on savers and tougher on the rule, but I hope you get the gist. But also remember that interest rates fluctuate, so over the long term, things can average out and the assumption of a 4% annual real return may actually work out.
4. Know how much your time is worth, and translate money into time (hours spent earning).
One of my favorite financial books is called Your Money or Your Life: it literally changed the way I thought about saving. This book was instrumental in inspiring me to become a better saver. It presents a formula that values your money in terms of your time by translating the money you spend into the time it takes to earn that money.
Example: How much does something cost in terms of your time? Start by knowing your hourly rate — or how much you are paid to work. If you’re making $50 an hour and you decide to buy a $250 camera (which is actually valued at $330 based on Rule #2 above), then it would take you 6.6 hours of work to actually afford that camera. Ouch!
This gives you some idea just how much of your life will be spent paying off what you just bought! Once again, if you add potential credit card charges into the mix, you’ll know where a lot of your work (or life) hours will be going. If this doesn’t discourage you from spending unnecessarily, I don’t know what will!
5. Concentrate on short term savings goals.
If you’re young, think about setting short term savings goals. You’ll find yourself feeling more motivated to save by focusing on those goals that are within your reach. Rob suggests funding your high yield savings accounts for goals you can achieve in three to five years.
6. Save for a concrete purpose.
Again, the concept of visualization is in play here. By thinking of a concrete goal or target for your saving efforts, the more likely it is you’ll stick to the program. How about pinning up a poster of your favorite vacation spot on your wall (or refrigerator)? I’ve used screen savers that would display images of things I would save up for, and they’d be great reminders of why I was sitting in front of my computer all day long.
Interestingly, Rob had one tip that I found myself disagreeing with to some degree — the idea of “paying yourself last” (check out his full tip list here). I still believe strongly in paying yourself first through automated savings programs since I can’t deny just how well this has worked for me.
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{ 31 comments… read them below or add one }
Thanks for much for linking to my interview! This has long been one of my favorite blogs. It made my day to see you talking about these ideas here.
I will check back a few times and, if people have questions about any of the ideas, I’ll do what I can to help out.
Also, I wonder if you have an interest in exploring the “Pay Yourself First” vs. “Pay Yourself Last” idea a bit more. There’s no question but that most effective savers swear by “Pay Yourself First.” My personal view is that in the long-term “Pay Yourself Last” will take you further. There are two ways in which we could go into this a little more deeply.
One is that I would be happy to send you a copy of my book for you to check out the full argument in support of the “Pay Yourself Last” concept. The title of Chapter Four is “Pay Yourself Last.”
Another possibility is that I could write a Guest Blog Entry making the case in more depth than I was able to in the short video interview and you could then add your thoughts either pro or con.
Please just let me know if you see any potential in those ideas. And thanks again for making my Friday by taking the time to share these ideas with your readers. That was a true kindness for all of us who developed them together back at the Motley Fool board (the development of these ideas date back to the Spring and Summer of 2000 — those were the days!).
Rob
Some simple but effective tips. Having a milestone set is definitely encouraging. When I had just started working my first goal was to save $35K to cover up the cost of my graduate expenses and since i had a target set too, i could manage to save a lot more easily than i do now.
This was a good video with good advice.
The one that really resonated at home for me was the one about short term goals.
It is so easy for people to say that you need to save for retirement. But Rob is right, most 20 somethings don’t know what they want for dinner tonight, asking them to save for something 40 years away is a losing battle.
Very interesting post. The tips are really helpful. I really liked the concept of equating money with work hours. The crux of the matter is that we need to inculcate a habit of saving and investing.
I like the last idea of putting screen savers or pictures of what you are saving for up. Though, I think people might start to question my sanity if I had a picture of shingles for the new roof I’ll need in a couple of years!
Is Rule #3 actually possible? With “high interest” savings accounts only earning 1-2 %, it’s going to take a very long while to be able to finance anything. For instance, that $2000 travel budget with today’s interest rates would take $100,000 – $200,000, not $50,000.
It would take me a very long time to save up that kind of money, and if I had that kind of money stashed away, I’d buy a house and save myself all the interest paid on a mortgage.
Thanks for these comments, everyone! These money tips are the kind that resonates across the board; I can see how each of us can have our own favorite 🙂 .
@Rob,
Thanks for your kind words! I would love a guest post on the “Pay Yourself Last” concept, for sure! I’m sure I’d also enjoy a copy of your book. You can write me at my contact address so we can correspond on this further. But I’d be happy with a contribution from you that explained this idea further. A lot of people, including myself, have been big on “Pay Yourself First” because it’s simple and works (as I mentioned) for everyone. But I believe that your suggestion of “Pay Yourself Last” may take more of a mental shift/effort and some work to be accomplished; it takes some decision-making to have it work. I think you’re implying here that “Pay Yourself Last” refers to developing a saving mindset that allows you to be an overall better, and happier saver. I definitely see the merits of these approaches, while I do think that for the more weak-willed, the “Pay Yourself First” can at least, get them somewhere. 🙂
@Beth,
The travel budget is just an example. And yes, the numbers don’t work out in today’s interest rate environment, but my purpose was to illustrate how the idea works. A travel budget may seem like a big chunk of money, so maybe a better example would be something smaller, such as perhaps, your “latte or coffee budget” or your “stamps” budget or your “commute” budget. What I took away here was the concept, which I thought was highly enlightening.
There are assumptions behind how this rule works, but I think that with some adjustment, you can figure out realistically what your final figures are for these expenditures. The big numbers may be intimidating but Rob has a great suggestion of focusing on the smaller budget categories so that they don’t overwhelm you. That said, I’d love to hear from Rob how he manages large scale spending categories like your allowance for home repair, for example, or groceries. Is it practical to apply the “Multiply by 25” rule on such big categories?
I do think that for the more weak-willed, the “Pay Yourself First” can at least, get them somewhere.
That’s absolutely so. I think of it as being like training wheels. “Pay Yourself First” helps a lot of people get started, and that’s important. But down the road I believe that “Pay Yourself Last” can take you to more exciting places. I started out saving nothing and then I became a good saver and then I became an intense saver.
I think that different approaches do the job best for people at different stages and seeking different goals. When I first started saving, I never would have imagined some of the possibilities. So at that time some of the things that I ended up doing would have sounded like fantasy stuff. But you don’t want to limit yourself in the long term by getting too emotionally committed to something that worked well when you were getting started.
I’ll get a possible Guest Blog Entry to you sometime next week and you can look it over and see if you think it makes any sense. I’ll also contact you about getting an address to which to send the book.
Rob
Is it practical to apply the “Multiply by 25″ rule on such big categories?
The rule applies to all categories. People who have not yet saved a lot will naturally want to start with the smaller categories. But sometime over the course of your life you are going to have to save enough to generate an income covering each and every one of the categories. Sooner or later you have no choice but to save what is needed to cover those amounts. All that the “Multiply by 25” Rule does is make you conscious that you are doing it and permit you to see that the huge overall task is actually being completed through the completion of a large number of small steps. The benefit is that breaking the task up into pieces helps you to get a better mental grasp of what is involved in the financial freedom project.
The Multiply by 25 Rule assumes that you will earn a real return of 4 percent each year on your investments. If you think you can get 5 percent real, make it the Multiply by 20 Rule. If you think you can only get 3 percent real, make it the Multiply by 33 Rule.
The poster is right that, if you can only get 2 percent real on your investments, it becomes the Multiply by 50 Rule. What this is showing you is the penalty you pay for not learning how to invest in stocks effectively. Money markets might only give you a return of 2 percent real. Learn to invest in stocks effectively, and you can safely count on at least 4 percent real. That cuts the amount of time it takes you to achieve financial freedom in half. That’s huge.
All of the work I do today is investment-related. It’s not because I have lost interest in saving issues. It’s that I have learned that the biggest money problem today is that our understanding of stock investing is so primitive (this is so of the “experts” as well as of most middle-class investors). Many highly effective savers become intimidated when the subject turns to investing. We need to get over that. If we fail to tackle investing topics, we end up having to save far more than we otherwise would need to save. So the two subjects interconnect.
It is not hard to obtain a 4 percent real return on your investments if you take a little bit of time to learn how stock investing really works. The Personal Finance Blogosphere has brought about a revolution in saving with the work that has been done on the frugality side in recent years. My hope is that the Next Big Thing is going to be that a lot of us are going to get together to do similarly important work on the investing side. Lots of people today trust the investing “experts” to tell us the straight story. The reality is that most of the people referred to as “experts” are salesmen in The Stock- Selling Industry and are not free to give us the entirely straight story. Blogs could do an awful lot of good in this area.
That’s a different subject. But the two subjects really do overlap at some point. If you really want to achieve financial freedom early in life, you need to do better than most other middle-class workers on both the saving front and on the investing front. You have to be open to some fresh ideas because the conventional ideas in both fields often do not get the job done.
Rob
I think people might start to question my sanity if I had a picture of shingles for the new roof I’ll need in a couple of years!
Back in the days when I was still employed in the corporate world, my wife and I would take our vacation each year to a different small town as part of our effort to decide which one we would move to when we had saved enough to quit our jobs. Our favorite town was Blowing Rock, N.C. We took a photo of a beautiful part of the town and had it framed and it was one of the things I saw each morning when I was getting dressed for work. This sort of thing makes a difference.
I say to go ahead and make a picture of the shingles your screen-saver. Make a joke out of it when people ask what that’s all about. The truth of the matter is people will be more receptive if you talk about your goals in a light way than they would be if it sounded like your were preaching to them. We all need to find ways to talk about the wonders of financial freedom without sounding like we are putting other people down. Because as humans we care what other people think. That’s a totally natural and healthy thing.
What has happened is that the people who sell us stuff have taken over our ability to have conversations with each other about what matters in life by repeating so many times commercials aimed at getting us to spend. The stuff promoted in those commercials has become the generally accepted view of what is “normal.” No! It is perfectly normal to want to be able to pay for shingles without taking on debt. When you make that your screen-saver, you are making a personal declaration of financial independence. I can offer personal testimony that making that declaration can end up taking you a long, long way.
These emotional issues are the most important issues. We all need to get over the feeling that it is odd or shameful or weird to want to save money. Choosing a screen-saver that encourages good money management practices is the sort of thing that really changes your attitude over time. It’s a high-leverage thing. It’s a seemingly small thing that can make a huge difference over time. We all need to take pride in becoming effective savers.
Rob
I really liked the concept of equating money with work hours.
That one comes from Joe Dominguez, author of “Your Money or Your Life.”
All of my work in the saving area is an exploration of the implications of the ideas put forward in that book. All of my work in the investing area is an exploration of the implications of the ideas put forward in Robert Shiller’s “Irrational Exuberance.”
I learned from watching Bob Dylan’s career that the trick is to steal from the best.
Rob
most 20 somethings don’t know what they want for dinner tonight, asking them to save for something 40 years away is a losing battle.
I believe that the single biggest reason why most people do not save effectively is that we tell people that the reason why they should save is to finance an old-age retirement.
People think saving is boring. But the thing that you obtain with saving is financial freedom. Freedom is boring? Huh? There’s a disconnect here.
Freedom is exciting. It’s the idea of financial an old-age retirement that is boring. Disconnect the saving idea from the old-age-retirement idea and saving becomes as exciting as all-get-out. That was certainly my experience in any event.
Rob
Thanks for your in-depth responses Rob, sure makes for a big start on a Friday morning!
I noticed you enjoy the art of saving money, so I wanted to quickly tell you about my website BOGOfetcher:
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As simple as it is, I really like the first point – just saving up a nice big round number and getting over that “hump”. Maybe I’m still too young to be able to budget the cost of each thing for my entire life:) – it’s simpler to work towards one little savings goal at a time.
Actually, my carrot and stick approach right now is more towards increasing monthly cashflow rather than building up an arbitrary amount of savings – it’s probably really contrarian, but I like knowing that I have a returning supply of funds each month (including the risk that comes with, I know), so I’m focusing on this first – it can also act as an emergency fund in the meantime.
I hate to rain on anyone’s parade, but let’s be sure to acknowledge that Rob’s advice boils down merely to advocacy of what is called in finance “mental accounting,” as distinguished from “real accounting.”
I suppose we are now living in a world where such ‘tricks’ and ‘mnemonics’ and various other artifices are felt to be necessary in order to entice a nation of rampant consumers gone mad to actually put a little aside, but I suppose I will stand alone and say “No.” The truth is the best policy, and a person should sit down either with a fee-only planner or by themselves after some self study, and determine their savings, retirement, and life financial goals in a straightforward and direct manner, and write this plan down, and then execute it. Nothing wrong with incremental goals, but the idea that Bennett espouses on the video “I have now saved enough to fund my book and newspaper needs forever. I’ll never have to worry about that again.” is ridiculous from all facets, IMHO, and encouraging that kind of mental trickery is little better than the denial that most people are already in regarding their actual financial situation.
One thing that would be extraordinarily compelling would be if Bennett were to give his own particulars in balance-sheet format, of how his advice has worked for him — income, outgo, net worth, etc.
I suspect that in cold hard terms, Mr. Bennett is actually no better off than those he proposes to preach to.
In the end, the question is: Do we want to feel good, or do we want an honest appraisal, that can lead to a legitimate and comprehensive long term financial plan?
One thing that would be extraordinarily compelling would be if Bennett were to give his own particulars in balance-sheet format, of how his advice has worked for him — income, outgo, net worth, etc.
I think it’s great when people can do that, Grouchy.
Here’s an article at my site that goes into a good bit of detail re my financial particulars:
http://www.passionsaving.com/Financial-Life-Planning.html
Around the time I wrote that article, I discovered the flaws in the Old School retirement studies that led to my launching of the New School of Safe Withdrawal Rate Analysis. The difference between the New School and the Old School is that the New School retirement studies include an adjustment for the valuation level that applies on the day the retirement begins. Numerous big-name experts have since confirmed that I am right in believing that valuations affect long-term returns:
http://www.passionsaving.com/retirement-calculator.html
The author of one of the Old School studies responded by launching a vicious internet Smear Campaign against me and against a good number of others who have pointed out the analytical errors in the Old School studies. Here’s a link to an article at my web site that sets forth the text of an e-mail that I sent to my congressman (Rep. Frank Wolf) seeking legislative help with this matter:
http://www.passionsaving.com/internet-harassment.html
One of the tactics in the Smear Campaign has been to take details of my personal financial situation, doctor them, and then put up thousands of posts all over the internet containing the deliberately deceptive claims. It obviously helps no one trying to learn the realities of saving and investing for there to be thousands of false claims about my personal circumstances being brought up in the search engines. So I have made a decision to provide no further personal information until effective action has been taken against the internet predators (I have been in contact with the police and the FBI and am trying to organize a group of blog owners to unite in self-protection against the sorts of individuals who engage in these sorts of tactics).
I have hopes that there will soon be a day when all of us will again feel safe posting honestly about our personal financial circumstances at our web sites and blogs. I think it is fair to say that that change will represent a big step forward for all of us who try to learn about the personal finance realities on the internet. Wish us luck!
Rob
With all due respect, I’d like to request that we stay on topic here and not devolve this discussion into long-standing internet debates that have what obviously seem to be very deep roots. Internet security is a subject for another day…
Rob, thanks for sharing a bit of your background here. I also appreciate others’ opinions about how these tips can be looked upon as mere “mneomonics”. Still, if the tips do the job, they’re useful. Ultimately, the bottom line is that you are able to save money, any amount of money, and that you are comfortable with the process. It doesn’t matter how you slice or dice it, if it works, then great. Even if it means playing mind tricks with yourself.
All this nitpicking and delving into theory and argument about which money advice is right, wrong, superior or lame is something I find moot and unnecessary, because in the scheme of things, your cash balance is really all that matters. Personal finance is after all, “personal” and can be viewed differently by different people based on their own relationship and attitude towards money (and that’s something you can’t easily change in people).
Thanks for the article. The 100,000 dollar savings goal is a little daunting if you’re just barely making ends meet. I completely agree with monetizing your hours, ie determining if something is worth spending time over by turning it into a monetary equivalent.
Thanks,
Glenn
I actually prefer to use an odd number rather than a round number for my goal. I do it to make it more memorable. For instance $97,327 will stick in your head and get more mental attention than $100,000. While round numbers work great for general concepts, more specific concrete ideas activate our minds better and generate more energy. It also falls into the SMART method of achieving goals. Specific always beats general. I go into more detail on my website. Just visit and search for SMART.
I love the idea of pay yourself last but I think for most people we should pay ourselves second… and last. God comes first 🙂 Set aside a minimum amount of pay yourself first. Then work to have the capability to pay yourself last. This will help you work to create greater wealth in your life.
Excellent post and look forward to seeing the full post explaining the whole concept of Pay Yourself Last 🙂
Forgot one point as well. You can achieve higher returns by investing in bonds. While they do have a slightly higher risk profile or require you to lock your money up longer they will significantly outperform CD rates. Even US treasuries are paying more and there is very little risk unless the whole country goes down in flames.
You can also consider closed end funds suck as BFK (a slightly leveraged Blackrock fund that invests in municipal bonds). The great thing about something like this is the interest you are paid.. is drum roll please… TAX FREE!! That’s one thing we often forget in determining how much money we need for something.. the taxes owed on it.
If you are in a high tax state investing in state specific general obligation bonds can save you a ton in state and federal taxes and give better returns. General obligation are better because they are paid from overall tax revenue. Even in California with the troubles they have with their budget, GO (general obligation) bonds are second in line behind education for payment. And it’s in their constitution so you won’t get treating like Chrysler or GM bond holders did recently.
Loans to private local companies can also be a good way to generate higher than market returns though with more risk. Helps to know the business or the owners extremely well.
i wish i could apply any of this helpful tips on my own! And start saving for my future!
thanks a lot!
I like the tips. I hope I’ll apply it to my life. 🙂
What a wonderful article, I found it to be very motivating to pay off my mortgage early and I was able to do it 9 years. As for finding safe returns that give off 4% I have found several cd’s that offer that. Again, great article.
Good tips! I especially like the idea of finding the “true cost” of what you are purchasing. The sticker price is rarely the final cost of an item. Thanks for sharing!
Saving money is a task we could all improve on. After the bills have been paid, many people find themselves rewarding their hard work at the office with weekend getaways, dinners out, new gadgets and countless other forms of entertainment. The truth is, there’s absolutely nothing wrong with this. But, saving and spending should be a game of balance.
I think saving should become a habit. With the lessons learned from the economic meltdown, youngsters who land a job should start saving from day-one. Putting aside a small sum of money shouldn’t be that difficult. It will surely come as a big help when emergency arises.
Saving should be part of your lifestyle and you should make it a priority. To allow yourself to save, you have to have money to save by decreasing your spending. There are many ways to put more money in your pocket through things like coupon use, moving balances to low rate cards, etc. When you have extra money in your pocket then you have something to save. Think you are living paycheck to paycheck? Track your spending and see where your money is going.
I definitely agree. These money saving tips definitely add up, and eventually you will end up saving so much money that you can probably purchase something big.
Great post! Tip #3 “Determine how to finance the stuff you spend on, for life.” is especially interesting.
These are some great tips on how to really start saving and putting some real money away.
I especially love the idea of focusing on something concrete. This will really help you visualize what you’re saving for.
Another way to save could also be getting stuff for free that you would normally pay for anyway.