The Psychology of Savings

Last night, we watched an excellent documentary on Netflix called Living on One Dollar. It’s the story of two upper middle class college students who are passionate about international development but realize that in order to truly understand their coursework they need to experience the life of those they hope to help. They went on a quest, living in rural Guatemala for a summer on  the equivalent of $1 per day.

Watching this documentary with my family made me realize three things about a lot of people in my life…

1. Many people I know live far too close to the edge. They are pursuing their calling, lots in full-time ministry, but money is a real problem in their life. (spoken or unspoken) They are one blown engine or medical bill from disaster.
2. Many people I know are living on less than $1 per day. Actually, they are living on -$20 per day. “The average American household carries a debt of $203,163 for financial baggage such as mortgages, credit card balances and student loan debt.” (source)
3. Like the Guatemalan families featured in the film, my friends don’t have an income or spending problem, they have a savings problem. “Bankrate.com reported in 2012 that 28 percent of American families have no savings. Another 20 percent don’t have enough saved to cover even three months’ worth of living expenses” (source)

The Psychology of Savings

Life on the edge is dangerous. Sure, you might not fall very often. But life away from the edge is better than life on the edge.

Balancing on the edge is a weird thing. It’s ultimately about confidence and attention. If you focus too much on keeping your balance and thinking about it… you’ll fall. And if you don’t think you can keep your balance… you’ll fall.

The same is true with not having a cushion of savings. You teeter on the edge. You try to ignore it but what happens? Eventually, you stumble and things get worse.

Having money in the bank, something you can fall back on if something goes wrong or something you can depend on when the check engine light comes on… it has a psychological impact on you.

You are more confident.

You are free to take some risks.

• Your boss asks you to do something you think is 100% stupid. And you tell him.
• You get a flyer for a class to learn something new. And you go for it. 
• You walk through a neighborhood you want to live in. And you know what it would take to make it happen. 

See, having some savings is more than merely practical. It’s more than a fallback plan. It’s a psychological advantage.

Our Story

2008-2009 dealt us a bummer hand. We had to sell our house in the middle of the worst housing crisis in modern history… and we pretty much got screwed. While we had multiple offers on our house, while we guaranteed the bank we’d pay the difference between what was owed and what the market would offer, the holder of our second mortgage erroneously illegally foreclosed on our house and sold it at auction. (Then sold our “debt” down the line, resulting in years of harassment and collections agencies.)

In short, our biggest investment went bust. Not only did we lose every penny we invested in the house. We also lost our credit rating.

Worse still. We lost our confidence. It sucked big time. We went from feeling like we were doing OK to right back to the edge.

That was 6 years ago. We were far too close to zero with my phone ringing off the hook, creditors chasing us, the letters, the threats, the whole 9 yards. (We were in the right and didn’t owe the banks anything… they stole our house! But when you cross that line the people over there don’t care about right or wrong. They just want the money their computer screen says you owe.)

I share that to say this: In the last 6 years we’re right back on track. In fact, our savings is stronger than ever. A couple weeks ago we did a review and were shocked to discover that we have nearly 1 years worth of income in long-term savings.

You want to talk about a psychological advantage? Confidence? We went from having 1/2 months savings to 12 months in 6 years. 

We looked at those numbers and realized something crazy: We can get way more aggressive. So, starting this month, we’ve adjusted our budget again. I jokingly call these “austerity measures.” But in reality, giving up cable or things like that aren’t that big of a deal.

Jump Start Your Savings

Before you eyeroll me I want to share with you the plan we’ve used. It’s not a gimmick or a book or a lecture series or anything like that. It’s drop-dead-simple.

1. Pay yourself first. We get paid on the 15th and the 30th. The very first thing I do is put a set amount into savings.
2. Pay your kids second. A few weeks ago I asked my Facebook friends what they were doing to save for their kids college. Almost no one had a plan. When Megan was born we started a 529 plan and put $25 a month in it. We’ve increased it periodically. I treat it like a bill. And while $25 a month might not sound like it’s going to help you get to $100,000 or whatever crazy number people toss around these days, it’s better than doing nothing. The little bit we’ve weaseled away each month since 2002 has resulted in us having about the first year of Megan’s college in that account. (This is about 20% of our college savings plan, I won’t bore you with the rest.)
3. Pay your bills third. I suck at paying bills. Quite frankly I just forget. That’s why I try to pay all of my bills in the same action.
4. Go cash only on the rest. More accurately, debit card only. When we buy something, whether it’s groceries or a car, that money comes directly out of our checking account. Don’t have it? Don’t buy it.
5. All forms of credit suck. Debt is debt. We have a credit card for business travel. I hate it. We’ve been told we need to buy a house. Maybe one day, but I’m in no hurry. After all, last time I bought a house the bank stole all my money. I’ve read and been told that “some debt is good.” This is only said by people trying to sell you debt. Two weeks ago Chase bank reported disappointing 4th quarter 2014 results… they only made $5 billion when Wall Street expected $6 billion. All debt sucks. It’s the enemy. Treat it as such. 
6. Convince yourself that you are poor. I’m sure there’s another word for this. But we intentionally live below our means so we can be generous and pour money into long-term savings. The typical family in Southern California spends 30%-35% of their income on housing: We spend 18%. Most people have two cars, we will eventually get two cars, but we’ve only had two cars for 10 months of the seventeen years we’ve been married… and that belonged to a missionary couple who let us borrow it.
7. Reward yourself along the way. We love our vacations, we love our hobbies… in so many ways I feel like we live high on the hog. But all of those things are just rewards. Ultimately, we aren’t as aggressive with our frugality as we possibly could be. And I think we’re able to save for the long-term precisely because of that. We live reasonably and we reward ourselves richly in responsible ways.

Wrap-Up

I’m bringing all of this up, not to brag, but to help you see that there’s a direct tie between the pursuit of all that you could achieve, what some people might call “God’s will for your life” and your lack of financial stability.

• I know too many with big, world changing dreams, who can’t pursue them because of a lack of confidence.
• I know too many people who think their dreams aren’t worth pursuing because they live too close to the edge.
• I know too many people who think living on the edge of financial disaster is somehow a burden they are called to bear as Christ-followers.

You have to address it. And it’s better to address it today than go another $20 in the hole to start tomorrow. 

Photo credit: Sunset in Rungsted Havn via Olga Capriotta via Flickr (Creative Commons) Her Third Birthday by Travis Swan via Flickr (Creative Commons)