Father’s Day made me think of what habits I have picked up from my father. The habit that jumps out first is how to be responsible with my money. The conversation that had the biggest impact happened 6 months into my first real job. I just received my first pay raise. My dad suggested I increase my 401K contributions by the 5% increase in pay I was about to receive. He reasoned (correctly) that people spend whatever money is in their checking account.
This lesson is similar to what I learned from Mindless Eating, that people tend to eat until their plate is empty. There’s also a Mindless Margin in personal finances. You’ll spend until your checking account is about empty. Putting your raise into savings first effectively reduces your spending because it’s a lot harder to spend money you don’t realize that you have.
The beauty of saving first is that I didn’t need to make any noticeable sacrifices. My monthly cash flow was the same and so were my monthly expenses. I kept doing what I was doing. In the meantime, my wealth was silently growing.
Saving first is another example of how a small (and rather painless) tweak can form the habit that is the nexus significant change. It got me motivated to look for more sophisticated ways to increase savings. I started tracking my finances on Mint.com and the budget function helped me identify expenses like a landline phone I didn’t need (or even want). Now the saving habit is so ingrained that it is like a game to me. Mint shows me my net worth and I enjoy seeing it increase year over year.
It’s now even easier to save automatically with programs like Save More Tomorrow developed by Richard Thaler at the University of Chicago Booth School of Business and Shlomo Benartzi at the UCLA Anderson School of Management. Save More Tomorrow plans increase your savings annually. You don’t have to remember to Save First like I have been doing. You only need to commit to saving “tomorrow” once and the program takes care of the rest. I really can’t think of any reason to not sign up for this.
If you’re interested in learning more about the principals behind Save More Tomorrow check out Shlomo’s TedTalk.
Thank you Dad for helping me to get started on the saving habit! I worry about a lot of things, but money is not one of them. It’s not because I’m rich. Trust me, I’m not. You don’t have to be rich to save away. You just have to start, even if the start is really small. In fact, it’s better to start small so you continue to do it. The sooner the better
Thank you for reading. Please let me know your thoughts.