In part 1 of this post I highlighted three factors that affect people’s ability to save money; stagnant incomes, rising cost of living and house prices. These factors are external to us and we have little ability to control them on an individual level. I mentioned that even with these constraints we can still save. Today I will address how we can get around this by looking at internal factors we have more control over, our spending.
(1) Reduce spending on non-essentials
Since the early 2000’s Americans spending on non-essential items (wants) has surpassed their spending on essential items (needs). Even though the distinction between needs and wants is subjective, the Bureau of Economic Analysis tracks non-essential items which would be considered a want by most people regardless of their circumstance. From the graph below you can see that since 2001 our wants consumption has outpaced our needs consumption.
Not quite convinced. Well, the devil is in the details. Here are some interesting facts about how much “stuff” the average American household has:
- The average size square footage of the American household has nearly tripled in size over the last 50 years even though the number of people per household has gone down.
- 10% of Americans rent an off-site storage unit. This type of commercial real estate is one of the fastest growing in the America.
- A quarter of the population that have two-car garages do not have room to park their cars in them. 32% of this same population only have room to park one car.
- Only 3.1% of the world’s children live in America, but they owned 40% of the toys purchased globally.
So the simplest (not easiest) way to save money is to limit the amount of money you spend on wants. One can do this by:
- Clearly define your needs (essentials) and wants (non-essentials). Be honest with yourself and be ready to make some tough decisions.
- Minimize the amount spent on wants (non-essential items).
- Bank the rest into savings/investing
- Prepare a needs and wants budget to see how much money is goes to needs and wants.
(2) Lower interest rates ≠ more debt
An increase in the purchase of ‘wants’ may not mean that people are not saving. It may mean that people are earning more money and able to meet their needs and have more left to splurge. However, incomes have been stagnant since 1989. What is fueling consumption is not a rise in income, but a rise in debt largely due to lower interest rates. To recap on how indebted we are as a continent and how poorly we are at saving money, visit my previous post for compelling stats.
Both Canada and the United States have seen a fall in interest rates over the last decade (as shown on graphs below). A fall in interest rates makes debt ‘cheaper to carry’. Most notably for lines of credit and vehicle debt. When interest rates fall so do minimum monthly debt payments. This gives the illusion that monthly payments are now ‘affordable’. Even though the cost to carry them has gone down, the underlying debt has not. If interest rates begin to increase, minimum monthly payments will rise. This will make highly leveraged individuals not only unable to save, but unable to make their debt payments.
Source: Trading Economics- Canada
The availability of credit makes us feel richer than we are, but true wealth comes from disciplined saving and living below our means over a long period of time.
If we are not prudent with how much credit we accept and how we manage debt, we will always feel like we never have any money to save. How we manage debt affects how much we are able to save. Saving money without acknowledging debt is incomplete. Here are a few tips to minimize debt so you can save:
- Redefine ‘affordability’: Don’t base a debt decision on minimum monthly payments, look at the bigger picture. Spend some time to answer the following questions:
- How much interest will I pay over the life of this loan?
- Will I be able to afford this purchase if interest rates go up?
- Will I be able to afford this purchase if income goes down?
- How much will my savings be reduced each month if I take on this debt?
- Keep your credit utilization to less than 50%. This will help keep monthly payments low so you can save.
- Know your spending habits. Only accept the credit you need.
- Pay off high interest debt quickly. Credit card debt and even some private student loans can have high interest rates.
- Use debt repayment methods to eliminate debt.
(3) Unplug from social media, television and technology
The distinction between the haves and the have nots is growing. This may make some people buy what they cannot afford and live a lifestyle they cannot sustain. Instead of living within our means, we strive to meet the expectations set by society from what we see on television.
Even within our own circle of influence, excessive use of social media sites like Facebook and Twitter may result in overspending to avoid FOMO (fear of missing out). Millennials spend the most time on social media as illustrated from the chart below. This may not necessarily be bad as some people use social media to expand their business, read news highlights and stay informed about world events. However, we should be selective about what we view and for how long. What we view on a regular basis has an impact on our spending habits, which affect our ability to save.
Here are a few tips to help unplug from social media and technology:
- Allocate a fixed amount of time each day for social media. Trim the time back each week until you reach your targeted goal.
- Avoid checking your phone while on transit. To reduce awkward stares, bring a book to read.
- Unless you use social media for business purposes, minimize the number of posts and photo/video uploads.
- Go on a ‘social media diet’ every 3 months. Give up a social media site for a week or so. Do this with an accountability partner. As the months progress you may find yourself checking social media less often.
In conclusion, we cannot blame others for our decisions with money. We must take control of our personal finances and ensure that we live within our means, use credit wisely and spend according to our values, not others. With these habits in place, we will find it possible to save.