Creating A Saver Mindset
How To Start Saving Money
When it comes to saving money, one of the biggest mistakes first time savers make is to think that in order to save money you need to save a lot.
Of course the more money you save the better, but even if you start off saving just one pound (dollar) that’s still a good start, and it’s certainly better than saving nothing.
In fact most savers begin by saving a very small portion of their income, and as they get into the habit of saving money they begin to save more and more.
This is an important point to recognise for first time savers, as many people feel they don’t have anything left to save and so never bother saving anything.
They may promise to themselves that someday in the future they will save, but because they never got into the habit of setting aside a portion of their income, but rather developed the habit of spending it all, when they do decide to start saving they find it difficult to do and start much too late in life.
So as a first time saver, the key is to remember that it doesn’t matter how much you start saving, even if that amount is just a few pounds each month.
What does matter is that you make the effort to change your financial habits, because as I said in a previous article, your financial situation is a direct result of your financial habits.
Therefore by changing your habits you can change your financial situation, and one way you can do this is by starting to save your money and cutting down on your expenses.
Every Penny Really Does Count
If you think about all the things you buy each day such as a sandwich, a cup of coffee or a pack of cigarettes, it might not seem like much. Perhaps maybe £5 or £10 a day?
However if add all these costs together just for the working week, you are easily looking at around £25-£50 that you spend on various small items.
Now in all likelihood you won’t be able to eliminate these daily expenses entirely, but there is a very good chance you could significantly reduce this cost by being a bit more economical with your money.
For example, rather than buying an expensive Starbucks coffee or a Subway sandwich, you could make your own at home and take those to work.
The same applies to all your other expenses, as there is a good chance most of those could also be reduced.
So if you are struggling to save your money because you always seem to have nothing left at the end of the month, the first thing you should do is to examine all your outgoing expenses (which ideally you should be keeping track of in your budget), and then find a way to reduce those costs.
Save A Little, Make A Lot
Let’s suppose that after looking at your expenses you decide you can save £25 a week (which isn’t a lot really).
If you continued saving this amount for one year, by the end of that year you would have saved £1,300. Not a bad saving just for making your own sandwiches and coffee!
Now that you are becoming more aware of your financial situation, you probably already realised that the smart thing to do with that money would be to invest it.
So let’s now suppose that you did invest that money and got around a 10% return on your money. In 5 years you would have saved up around £8,400, and after 10 years, around £22,000.
If you started saving early enough, lets say at age 30, then by the time you retire you would have saved up £66,000, and that’s just from being a bit more economical on your spending!
It doesn’t include any extra money you choose to save from your income, so if you factor that into the equation, then by the time you retire you would have well over £100,000 to enjoy yourself with.
That’s how much of a difference saving even a small amount can make to your financial future.
Interest, Your Best Friend
If you are wondering how saving a small portion of your income each month can leave you with such a big nest egg when you retire, then you probably aren’t familiar with the different types of interest. So let’s have a look at some of these now.
Regular Interest
Regular interest is the type of interest you get only on the amount of money you have in your account.
For example, if you have £2000 saved in a bank account which offers you a 5% interest rate, then at the end of one year you would have earned £100 extra just from that interest.
Compound Interest
Compound interest differs from regular interest because you get paid interest on the money you have in your account, plus any accumulated interest from period to period.
In other words, compound interest lets you earn interest on your interest. So the more money you save the more money you will accumulate.
Compounding Interest
Compound interest can be compounded either continuously, daily, weekly, monthly, quarterly or annually.
The more often your interest is compounded the quicker your money will grow, so ideally you should try to find a bank account that compounds either continuously or daily.
By the time you retire (assuming you start saving £10 a week at age 25 with a 12% compound interest rate), you would have saved around £520,000 of which £499,000 would be from interest!
If you saved only £10 a month with an 8% return, then by the time you turned 55 you would have saved around £15,000.
That’s the magic of compound interest, and why saving even a small amount of money when you are young and knowing how to manage it wisely, can ensure your financial security for the future.
Getting Into The Habit Of Saving Your Money
Even though in western society the standard of living has been increasing and people are earning more than double of what they did 40 years ago, most people still feel as though they don’t have any money left to save.
One reason for this is the rising cost of living, but that’s only a small part of the problem.
The real reason why people find it difficult to save is because western society has turned them into consumers, who have been encouraged to spend their money rather than save it.
As a result, despite earning more than two-thirds of the people throughout the world, they waste their money on non-essential items and things they don’t really need.
Spender Or Saver Mindset
The other major factor which shapes a person’s financial habits is the people they associate with.
Generally speaking, the amount of income you earn is likely to be similar to the people who you hang around with the most.
This includes your friends and your family, both of which can give you either a spending mindset or a savings mindset.
For example, if you want to “keep up” with your friends, then you are likely to buy more and more things just because that’s because what everyone else seems to do.
You may buy new clothes, movies or even a new car just to maintain your status within your social group. The effect of this is that it locks you into a mindset that you need to spend your money rather than save it.
If however you don’t really care what your friends own, then you are much more likely to have developed a saver mindset because you are not constantly trying to keep up with them by buying the latest things.
Of course there are many other reasons why people spend their money, but the point is that regardless of how much you earn, everyone can cut back expenses in some area of their life simply by educating themselves about the financial and psychological aspects of money.
So before moving onto the next section of this article, read the following two articles if you have not already done so.
They will have an immediate impact on your financial mindset, by raising your awareness of two key topics; your money personality and budgets.
“Do You Have A Bad Money Attitude?”
If you are really serious about improving your financial situation, then I recommend you start reading this article series from the first article in the money section.
