Basic Finance

The Habit of Saving

I know there are hundreds of diet blogs out there saying, “C’mon fatty, you need to eat less.” And I know there are thousands of people reading that advice thinking, “I already know that—asshole—but it’s a little easier said than done.” So when I, and many other financial blogs, suggest that people ought to develop a habit of saving, I’m sure some of you wonderful readers respond similarly.

“Jesse, you insult me. I already know that. Of course I’d like to save an extra $1000 this year, but I don’t have $1000 to spare. By the way, how’s the ride on your high horse?!”

That’s fair! I shouldn’t be offering sweeping advice without providing some vehicle to obtain those goals. You know, something concrete. So today, I’m going to offer a couple ideas about how you can save more money. My hope is that these ideas begin so simply that any person could use them. In my ideas, the first bits of money come from your couch or change jar. It won’t be a drastic change to your current lifestyle. Then, once you get into the habit of saving little bits, you’ll be more comfortable finding room in your life to make progressively greater savings a priority.

Idea #1: Penny by Penny

Ben Franklin—the founding member of the Best Interest, FYI—once said, “A penny saved is a penny earned.” Remember that one? So with Uncle Ben’s advice in mind, we’re going to start Day 1 of our savings plan by saving one penny. I know…seriously, just one penny?! That’s because it’s a baby step.  Day 2, we’re going to bump it up to 2 pennies, because 1+1=2. Day 3, $0.03. We keep on doing that, and then after our first month (31 days), we have $4.96 saved. If saving $5 over 31 days is too difficult, then I will absolutely judge you from this great view in my ivory tower.

Month 2 starts with 32 cents on Day 32 and goes to 59 cents. If we do the math, that’s a total of $12.74. $13 not spent equates to half a pillow removed from your fort, or about one less ounce of ivory in my house.

Let’s track out the rest of the months…

January$       4.96
February$    12.74
March$    23.25
April$    31.65
May$    42.16
June$    49.95

Half way through the year, and penny-by-penny, you’re now saving $50 a month. I know it might feel like you don’t have $50 to spare today, but all you need to worry about today is one penny. Keep that in mind! Give yourself time to get used to it, penny by penny. After six months, we get to about $1.80 a day. The average American spends $165 per day. So I’m asking the average American to save 1% of their daily spending at this point.

habit of saving

…the rest of year…

July$    61.07
August$    70.68
September$    77.55
October$    89.59
November$    95.85
December$  108.50
  
1 year TOTAL$  667.95

By the end of the year, you’ve saved over $600, and your current saving rate is greater than $3 per day. Does that feel like a reasonable first attempt at a savings plan? This plan is as fast as granny in her Buick navigating the Wegmans parking lot. And heck, if the penny method feels too slow for you, then why not boost it up to a few pennies, a nickel, or a dime?!

Idea #2: Jesse’s “Clear” Habit of Saving

James Clear is not Ben Franklin. Clear is taller, more muscular, and absolutely despises kites. Nevertheless, Clear has a cool idea called “1% Better Every Day.” It’s another baby step method.

The idea is you start at Day Zero, so your “skill level” is a basic 1.

On Day 1, try to get 1% better. Just one baby step of 1%. Therefore, your skill is now 1.01.

On Day 2, you get 1% better than Day 1. It’s not that you’re at 1.01+1.01=1.02. Instead, you’re at 1.01*1.01=1.0201.

1.02 vs. 1.0201 is a tiny difference, but it will matter.

After Day 3, you’re at 1.01*1.01*1.01 = 1.013. Notice how the little exponent (3) equals the day we’re on? That shortcut will come in handy.

After Day 100, you might think that you’re now 100% better, or the jump in skill from 1 to 2. But 1.01100 =2.7. You’re actually 170% better.

After a year, you’re now 1.01365 better than Day Zero. And that math comes out to…3778%, or 37.8x improved! (FYI, what you’ve just witnessed is the exact same math behind compound interest).

From self-love to finance

James Clear uses this idea to motivate people to improve themselves. His thoughts is, you won’t become an expert or all-star without hundreds of 1% improvements. But I want you to use this method to baby step yourself to a full-fledged habit of saving.

Now, I think that increasing your savings rate by 37x in one year is unrealistic. We ended the year of Penny-by-Penny by saving $108.50 in December. Increasing that by 37x would come out to $4000/month. If you’re socking away $4000 per month, I’m gonna give you a big high-five and inconspicuously let you know how much I love pool parties.

So rather than targeting 1% every day, let’s target 6% improvement every month. $108.50 increased by 6% becomes $115.01. It’s a $7 increase…not too painful, right? If we keep on going…

January$  115.01
February$  121.91
March$  129.23
April$  136.98
May$  145.20
June$  153.91
July$  163.14
August$  172.93
September$  183.31
October$  194.31
November$  205.97
December$  218.32
  
Total$1940.21

On Day 1, we saved a penny a day. By December of Year 2, we’re saving $218 per month. And it was done one small goal at a time. Nothing too severe, just a gentle rolling increase. If you’re unsure how to start saving, I think either of these two ideas could help you out. Start slow, pick manageable goals. Once you become comfortable, try to extend your goals outward bit by bit.

Today, the idea of saving $200 a month might sound painful. But compared to $199 a month, $200 won’t be that bad. $199 isn’t that painful compared to $198. We can use that idea–small steps aren’t that painful–to get all the way back to the start: one penny.

You might ask, “But where exactly do I put this saved up money?”’

Where to Put Your Savings

As a very first simple step, I’d consider opening up a savings account with either a local credit union or, more preferable, an online bank that offers a high interest rate. Once you have an account open, you will be able to create a sub-account called “My Best Interest Savings Plan: Jesse, You Rock.” This is where your savings will go, and you won’t touch it! Don’t let your savings stash mix in with your spending money. Keeping money separated allows you to easily identify, “This is all the money I’ve saved up. It’s not for spending.” Once you get your feet underneath you and you’re interested in more complicated steps, then perhaps you should open a Roth IRA or other investment account. But we’ll save that for another day…

The point of today’s article is to develop a habit of saving through consistent small steps, just like learning to walk. Maybe you want to save penny by penny, or maybe you’d rather get X% better every week or month. Both are good options. But if you haven’t started any serious savings yet, then there’s no time like the present. Start the journey! Take that first step.

Thanks for reading the Best Interest. -Jesse

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About Jesse Cramer

I’m Jesse. I’m an engineer, a new owner of an old home, and an avid reader/writer. I hope you enjoy my thoughts, numerical breakdowns, and general musings. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@BestInterest_JC) or on Reddit (u/BestInterestDotBlog). Many of my posts have been directly influenced by my readers. It’s the most fun part of writing this blog. And as always, thanks for reading the Best Interest. Jesse
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4 thoughts on “The Habit of Saving

    1. Great work, Christian. You’re now using “status quo bias” to your advantage (it was researched by a UofR alum!!). Automated saving is extremely effective. The research found that once you set it up, you’re a bit too lazy to change it! 🙂

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