Week 3: Save actively, spend passively

Growing up, no one sat me down and explained how to take care of my financial health. Asking salaries or prices of expensive things were considered rude. I picked up bits and pieces of advice floating around- generic advice like don’t splurge, save for the rainy day, don’t get into debt, and so on. So even though I started earning from age eighteen by tutoring other students, I did not know how to negotiate for salary or manage my money until a long time.

It is only recently that I started watching videos on YouTube about money management and started to pick up useful tips. And the best tip I heard changed the way I look at money. Earlier, I used to spend what I needed and saved the rest. Here, they talk about saving what you need and spending the rest. It looks like a simple case of reversal. But at the core, it forced me to address a very important question- how much do I need or want to save?

By spending first and saving the rest later, spending continues to be the primary and variable factor. So long as I did not get into debt, I knew that I had a large pot of money to spend from. But when savings became the primary and constant factor, I had to account for what I was spending. So, I came up with a simple algorithm.

After every paycheck, I pay off all pending bills from the past cycle (credit card bills, rent, cell phone bill, etc.). Whatever remains, I put half of it in my savings account (I do not touch that money again). The other half, I keep for my expenses until I receive my next paycheck. When I get paid again, I simply add that to my current account, pay off all bills, save fifty percent of whatever remains, and repeat cycle.

Here is an example (all numbers are arbitrary)

First paycheck: $100

Pending bills (credit card bills, rent, cell phone bill, etc.): $40 (somewhat variable every cycle)

What goes in the savings account: Half of remaining: $30

What remains: $30

Expenses: $10

Remaining + Next paycheck: $(100+20): $120

Pending bills (credit card bills, rent, cell phone bill, etc.): $20 (somewhat variable every cycle)

Remaining: $(120-20): $100

What goes in my savings account: Half of remaining: $50

What remains: $50

Repeat cycle.

The basic idea is that every time I get paid, I clear all my pending bills and put half of the remaining money in my savings account (I never touch that account). The important thing is that the savings should be put in a separate account that becomes invisible money. This creates a visual illusion that I don’t have much. When you know your denominator (total available money) is small, you adjust your numerator accordingly.   

Doing this has helped me in many ways.

·       It has made me actively accountable for how much I am saving.

·       It has made me aware of when I am splurging.

·       If there is a large expense coming up, I delay it until I have enough money from the next pay cycle. Delaying things also prevent me from impulsive buying.

·       Rather than spending being an active process and saving being a passive process, saving has become active and spending, passive.

This is a saving algorithm that I have figured out for myself. You can create your own algorithm. If you have smart saving tactics, I would love to hear from you.

sunshine