Why Savings Often Don’t Work Out
I have been working for more than 5 years. My finances, on the other hand, have only recently started to make sense.
Over the years, I have earned a lot, spent a lot, lost a lot, and borrowed a whole lot. However, I couldn’t seem to hold on to my savings even though I have been consistently following the most widely spread personal finance principle, Pay Yourself First. So what’s wrong with this picture?!
LACK OF PURPOSE
Let me set things straight. Throughout my career, I have managed to live using only 70% to 80% of my after tax income. In theory, this should have given me at least 20% of everything I have ever earned as savings in the bank. But, as with all things in life, reality is much more complicated.
Things happen: business busts, bad investments, car repairs, emergencies and disasters. On top of that, the good things in life are quite irresistible: vacations, home entertainment systems, flashy gadgets, etc. With a lot of “purposeless” savings at my disposal, I could easily choose to blow it all up on a single buzz investment deal, an expensive Blu-ray system, or a five-star vacation abroad.
Discipline is only half the battle. A successful savings strategy must based on motivation and not just on routinely setting aside money; motivation goes hand-in-hand with a clearly defined purpose.
It makes perfect sense when you think about it. Which will give you a clearer incentive to save: the “future” or a brand new iPad 2; an “emergency” or in preparation for the next Typhoon Ondoy; “retirement” or for a year-long trip around the world? Saving should have definite goals just like all of life’s other undertakings. Saving for vague ends is a recipe for disappointing results. Saving without having any direction leads to ineffective, inefficient and inconsistent allocation of your hard-earned cash.
In my roller-coaster financial life, a key turning point happened when I gave in to my obsessive compulsive tendencies and decided to keep close track of our finances (my wife and I decided to join accounts). I stumbled upon a great open-source (free) accounting software, gnucash, to help me do the job. The beauty of tracking finances through software is that you can see all your assets, liabilities, incomes and expenses in one dashboard. This enabled me not only to see how our money flows but also to monitor our financial behavior. And boy were we behaving stupidly!
So, for our personal use and after several months of tweaking, I came up with a simple savings system that involves “purpose” funds. As you may have guessed from the name, each fund has a purpose, namely:
- Available Balance – This comprises the bulk of our monthly budget. We use it for our day-to-day spending needs, charities, and small luxuries.
- Used Balance – Money that logically has already been “used”. We use this account for credit card payments, rent, utilities, subscriptions, etc. This fund helps us minimize our liabilities and keep track of our “true remaining balance”, that is the money that we can actually still spend. I am quite proud of coming up with this simple solution to prevent too much credit card debt.
- Investment Funds – Money is our slave and not the other way around. This fund’s primary purpose is to make more money through investments, businesses, and education.
- Emergency Funds – When the rainy day comes, this fund makes sure that we are prepared. A very harsh rainy day (Typhoon Ondoy) came to our lives last September 2009 and knocked home the real need for emergency cash. This fund takes more discipline than others though since we have to be strict to spend it only in times of emergencies.
- Luxury Funds – This is our favorite fund. We use it for the finer things in life such as vacations, gadgets, hosting parties, etc.
In the near future, we also plan on adding a Baby Fund into the mix. Have a great day. 😀
I would love to get your opinions. What is the most important money lesson you had? How did it change your life?
- Our Financial Plan for the Next Ten Years (thesimpledollar.com)
- Establish Your Financial Priorities (Worksheet Inside!) (getrichslowly.org)
- 3 Essential Rules of Personal Finance (christianpf.com)
- Forget Frugality: Focus on Earning More (finance.yahoo.com)
- 5 Simple Ways to Save for Vacation (christianpf.com)