Otterwize

What You Otter Know About Personal Finance

Saving 101

Saving money is a prerequisite to accumulating wealth. Every cent counts.

“Don’t save what is left after spending; spend what is left after saving.” (attrib. Warren Buffet)

Whether you save $1 at the grocery store with coupons or $100 by cooking at home more often, every little (or big) bit helps. You should view saving money as if your life depends on it because your financial life certainly does. If you earn $1 million a year but spend every penny, you will end up . . .  well . . . penniless.

Saving and spending habits

Spend less than you earn.

  • It doesn’t matter how much you earn. What matters is how much you save.
  • “Living within your means” is a confusing expression. You should try to live below your means in order to have any meaningful savings at the end of the day.
  • If you spend everything you earn, you are just living paycheck to paycheck and will have nothing saved after your bills are paid. 
  • If you spend more than you earn . . . STOP! Your credit-card company will love you, but you will just end up with a mountain of debt that will strangle your finances. 

Make saving a priority.

Merely “affording” the lifestyle that you live is not good enough if you aren’t also putting money into savings every month.

  • People often think that they should have fun/enjoy their 20s and not worry about saving for the future. That means they are missing out on some serious compounding. We’re not saying don’t have fun, or rake yourself over the coals for a few impulse purchases, but the earlier you get in the financial game, the more your future self will thank you. Think of it like brushing your teeth as a kid. You didn’t see the point at the time—your adult self was in some infinite future—but aren’t you glad you took good care of them now?
  • “Can I afford this?” is a trick question. If “affording” something means putting it on a credit card and just paying the minimum every month (even if on time), then no, you can’t afford it. If it means you can pay for it from current income, but you aren’t saving anything at the end of the month, then no, you can’t afford it. If it means you can pay for it from current income and you are saving every month, then . . . that’s a different question.
  • If you allocate money to savings right off the top, before you pay your other bills, then in theory (that’s the key here—you need to make this work within your budget) you will spend less on non-necessities to make up the difference.
  • Setting aside money to put towards your own savings, before you have a chance to spend that money elsewhere, is a good habit to get into.
  • It is easy to spend money on incidentals and other discretionary items that don’t really matter in the end.
  • At the end of the year, you’ll probably appreciate the growing balance in your savings account a lot more than those extra restaurant meals or other purchases you gave up along the way.
  • Pick a set percentage of your income, and try to put aside that amount every week/month/paycheck (whatever system works for you).
  • Don’t spend money mindlessly.
  • Saving money begins with a money-saving mindset.

The news is full of stories of famous athletes and celebrities (or lottery winners) who earned multi-million-dollar salaries but had serious financial problems from out-of-control spending.

A person who earns $4 million a year and spends it all is worse off in the end than a person who earns $40,000 a year and saves 5% of that. Saving money and watching your spending are important, no matter how much money you earn.

Before you spend money on an item or experience, ask yourself if the value of that item to you is worth the money you will have to pay for it.

One way to think about how much something is “worth” to you is to think about how long you have to work to earn (after tax!) the cost of that item.

The importance of budgeting

Create a budget and track your spending.

Take a candid look at your spending, and identify areas where you can save money.

  • You can’t cut back on expenses if you don’t really know how much and where you are spending.
  • You might be stunned to find out how much you spend, for instance, on restaurants and bars, subscription services, or other things you could reduce or do without.
  • There usually ways to trim the fat from any budget.
  • Start out by setting aside a small percentage (even if you start at 1%) of your take-home pay for savings.
  • If you can manage 1% for a while (6 months? 1 year?), try to increase it to 2% or more.
  • Continue to increase your savings percentage in small increments over time. Trick yourself into not feeling the difference.
  • Find ways to save small amounts that you don’t really notice on a day-to-day basis. (See “Switch from This to That and Invest the Difference.“)
  • Small amounts compounded over time can add up to large sums.

Saving small amounts every week or every month also gets you into the habit of saving, which is a good practice to cultivate for life.

  • Include an actual line-item for savings in your budget, even if you begin with just a small amount.
  • For more on budgeting, see here. 

Automate your savings

  • If you want to put your savings habit on autopilot so you don’t have to remember to move funds, you can set up an automatic transfer from your checking account into your savings account or other account.
  • Automating your savings is a good way to build your savings without having to think about it.
  • The amount is not important in the beginning. Getting the process set up and automated is a great first step.
  • See Basic Finance Skills You Otter Know under Adulting 101 for details on how to set up automatic savings at your bank.

Don’t succumb to lifestyle inflation

Don’t fall prey to lifestyle inflation (spending more as your income goes up, so that you have no net increase in savings or net worth). Lifestyle inflation is sometimes called “lifestyle creep.”

  • If you get a raise, new job, or promotion; earn a bonus or commission; take on a side hustle; get an unexpected tax refund; or find some other new income stream, try to put some percentage of this extra income towards savings (or paying down debt if you have debt—the point here is not to spend it all).
    • The percentage of this new income that you save is of course up to you (and could even be 100%). What’s important is that you don’t spend 100% of these additional funds, leaving your future self no better off than you were before the income boost.
    • Some people try to put 50% of every raise (or other increase in income) into saving for retirement. Whether you choose 50% or some other percentage, the goal is to come up with a plan that you can apply to your own life.
  • Don’t allow yourself to justify spending all of your increased income, especially on things that you really can do without.
    • A splurge now and then is fine, but don’t make your new income your new norm.
  • It’s better to have an annual savings rate than an annual savings amount. When your income goes up, your savings should go up as well.
    • If you earn $40,000/year and save $100/month, your savings rate is 3%. If your income goes up to $50,000 and you still save $100/month, your savings rate is now just 2.4%. If you continue to save at a rate of 3%, your new monthly savings amount would be $125/month.
  • You’ve probably heard the old adage that work expands to fill the time available to complete it. Don’t allow the financial corollary of that to be true:
    • Spending should not expand to use up the income available to pay for it.

Before you break the piggy

Save money on debt repayment:

Save money on bank fees:

  • You should not be paying large amounts to banks just to keep your money there.
  • If your no-fee checking or savings account has a minimum balance requirement, make sure your balance stays over this minimum. Read the fine print carefully to know if the minimum is a monthly average, running daily amount, etc.
  • Sign up for text alerts to notify you that your balance is approaching the minimum so that you can transfer money in before the date cutoff.
  • Always use an ATM at your bank or at a bank within your network so that you don’t have to pay ATM fees just to withdraw money.
  • Monitor your checking account balance and your payments so that you never have to pay any steep overdraft fees.
  • Sign up for overdraft protection tied to one of your other accounts (as opposed to courtesy overdraft protection, which can have high fees when it kicks in).
  • There are lots of other bank fees that can creep up on you (maintenance fees, opening deposit fees, certain transfer fees, etc.), so read the terms carefully before you make a transaction so that there are no surprises.
  • Always read the fine print.

Save money on housing and transportation:

Save money on insurance:

  • Bundling insurance products (property, car, life, etc.) can provide you with savings that you may not be able to get by using different companies for each type of insurance.
  • You can also save money by comparing prices using one of the insurance fintech solutions.

Save money on shopping:

Sign up for grocery rewards/loyalty cards or other department store/retail store rewards/loyalty cards to get in-store discounts and rewards applied automatically, emailed, or mailed to you.

  • Go to the store’s app or website before you shop to see if there are any new promotions, discounts, or digital or print coupons.
  • These are different from store-branded credit cards. Rewards cards and loyalty cards are just for discounts and rewards. These cards do not provide credit.
  • Do not sign up for a store’s credit card just to get a one-time reward on your purchase on that particular day. Having too many new credit cards is not a good idea for a lot of reasons.
  • If you buy something in-store or online and it goes on sale shortly thereafter, you can always try to contact the vendor. Many stores (brick and mortar or online) will apply coupons or sales retroactively if you ask within a few days or more, just to maintain goodwill.

Save money on extended warranties:

  • It usually makes sense not to buy these pricey extended warranties and, instead, to “self-insure.”
  • If you add up the cost of all those extended warranties that you might buy over the years for all your various devices, electronics, etc., you’d probably be spending more on the warranties than on the cost to replace the one that statistically may break outside of the usual warranty period.
  • Some exceptions might be for high-priced electronics like computer equipment, but that’s a personal choice.
  • Some credit cards will extend warranty coverage if you make the purchase with that card, so know the features of your credit cards before you pay for any item that might need extended coverage.
  • If you have renter’s or homeowner’s insurance, some of your electronics may already be covered in your policy.

Save money on food:

Cooking more at home and cutting back on the number of times you eat at restaurants, buy prepared food, order in delivery, or pick-up take-out can save you a lot of money that can be better spent elsewhere.

  • Otterwize has a section called Simmering Savings that provides low-cost recipes and compares the cost per serving to cook at home vs. eating at a restaurant.
  • Bottled water and seltzer: Switch to plain tap water or buy a water filter for your tap to save money on bottled water. (See “Switch From This to That…“) If you drink seltzer, try a seltzer machine, which uses just plain (or filtered) tap water. (See our favorite carbonated water maker.)

Save money by giving up smoking:

This one is easy: quit smoking. You can save on average almost $90,000 on the cost of buying one pack of cigarettes per day over time if you kick the butt to the curb. 

Save money on subscription services, clubs, and memberships:

Do an audit periodically of the subscription services, clubs, and membership plans that you have signed up for and determine whether you are really taking full advantage of them enough to justify the cost. (How many times do you actually go to the gym?)

  • Look over your credit-card statements to find these monthly subscription services that you may not even realize you are still paying for.
  • Companies love the monthly auto-renew feature for precisely the same reason that consumers should not love them: It’s easy to forget that you’re paying for something month-after-month that you may not even be using. Cancel any monthly plans that you don’t need.
  • If you forgot and you see the charge, call them. Usually they will refund you. 

Saving apps