I once heard a radio program which was lamenting the negative savings rate in America. The guest was an author of a book about saving for retirement and naturally had lots of opinions on the subject. She gave tips from her book, telling listeners how to improve their financial situation and save money. Among the tips were:
Setting up an automatic debit from paycheck into savings account.
Only having one credit card.
Using cash to purchase whenever possible.
Impose a waiting period on purchases to avoid impulse spending.
Doing the math on a purchase to figure out the final price with interest.
All of the tips are good, but I’ve heard them all before in many different iterations. The media is full of similar tips and exhortations for people to save money. What none of these reports or books make clear is why people should save money. Well okay, they say “for retirement,” but retirement is only a concept. Without a concrete plan it is hard to feel that saving for it is important. Saving for retirement is much easier when you know what it looks like.
So ask yourself, what is your dream? If your dream is to own a farm in the countryside, figure out how much it will cost to buy and to run. Then save money hand-over-fist to make it happen. Set a goal that by age 60 you’ll be able to afford that farm and have enough money to keep it running for the rest of your life. If your dream is to take trip around the world, do some research. Figure how much it will cost and set a goal for when you’ll have that money saved. If your dream is to never having to work again, figure out how much money you need to have saved so that you can live on the interest. If you dream of making pottery and selling it, find out how much money you need to have saved so that you can live on it for two years while your pottery business gets off the ground. If you dream of owning a fancy car, research how much it will cost to buy it and maintain it, then save for that.
The key here is to plan ahead. When Howard and I got married we had several goals. We wanted Howard to be able to earn his living creatively. We wanted to own a house. We wanted to have several children. All of our spending was structured to accommodate those long-term goals. When Howard got a pay raise, we didn’t raise our standard of living much. We saved the extra against a planned goal. Even when we had the house and the kids, we still spent carefully because we had the dream of Howard being able to make a living as a cartoonist. We did spend some money on luxuries like nice furniture and new cars, but each of these purchases was balanced against the larger goal. Each time we carefully considered whether the expense added more value to our lives than having Howard work from home would. Eventually we reached the day when Howard quit Novell. That was scary and I confess I did some second guessing about some of the things on which we’d chosen to spend money. Particularly during the first 15 months when we supported ourselves on a few corporate cartooning contracts and our savings. We made it through thanks to the previous planning and saving.
Now we have reached the point where all our just-got-married dreams have come to pass. We have a house, four kids, and our income is from a comic strip which Howard draws and I make into books. We have not stopped saving. At the moment our monetary focus is on paying down debt and creating a financial buffer. We like our life style and want to be sure that we get to keep it. This is particularly important because we know that our current good health will not last forever. Beyond that, we have new dreams. We want to help pay the way for four kids to attend college. We want to travel interesting places. We want to remodel the house. We want to be able to employ others so that they can reach their dreams. We use these new long-term goals as guideposts to decide how to spend the money we have in our pockets today.
What we don’t do much of is stash money away for retirement. We don’t really plan to retire. We like to work and we plan to work as long as we are able. Instead we are constantly updating our financial plans to match our long-term goals. Frequently this means that we put off buying things that we want, but don’t particularly need. This process is much easier because I am able to picture what that money will be used for instead. This is why we save.
Edited to add: A couple of people have made excellent points about the need for saving against emergencies and the value of sheltering money from taxes via IRA accounts. Both of these have merit and really ought to be considered when making a long term financial plan. And we do think about them at our house, but somehow they slipped my mind while writing this post. I guess I was trying to introduce the concept of making saving specific and directed to those who don’t think much about savings. However I now see that this entry is an incomplete picture.