Discover more from The Personal Finance Project
Successful Saving: The Beginning
Are you saving for that next big purchase? Keep up with the Successful Saving series and read more on how to nail your savings goals.
Successful Saving: The Beginning
This edition is the first in a series on Successful Saving. Stay tuned as I roll this out over the following few editions.
Want to keep up with the Successful Saving series? Subscribe!
In this edition of the Personal Finance Project Newsletter:
Planning - Where to Begin
The importance of saving is abundantly clear. We all want something, and it is often just out of reach. Saving allows us to compile our resources, stashing them away for future expenses.
I have observed that many people fall short when it comes to the actual practice of saving. Failure seems to be present along these paths:
We intend to save (rather than spend) but undertake little action. Instead of moving funds into a savings account, we just let it sit in our chequing account, and over time this money becomes subject to reckless spending. Consequently, it seems like money goes out faster than it comes in, and we fall short of savings success.
Sometimes we go through the motions of saving, but we save whatever cash is stockpiled in our chequing account rather than making consistent and deliberate transfers to our savings account. It is better than nothing, but similarly to the first path, we may overspend (and under-save), leading to failure.
We might even have a savings plan, but the various complexities of life seem to dismantle its feasibility. Soon enough, a once attainable goal becomes increasingly impossible, and failure ensues.
Just because these paths likely lead to failure does not mean success is impossible. For example, when someone has tamed their spending desires, they may still be capable of diligent saving within their chequing account or through irregular deposits into a savings account. This is especially true when their savings goal makes up a small amount of their income and if the timeline for achievement is flexible. Failure is more prominent when our savings goals are relatively high compared to our income and when the timeframe for success is shorter and more rigid. For this reason, successful saving is not about how much you make, it’s about how much you keep.
Successful saving is not about how much you make, it’s about how much you keep.
Embedded in these observations are a couple of interrelated themes:
Planning - with a plan that works for you (instead of disabling you), the path to success is clear. Here is where we focus on embedding the complexities of life into the plan so that we can protect our core goal while undergoing constant change.
Prioritization - Success requires clearly outlining the ideal balance between spending and saving. A pecking order of importance ensures that we spend and save according to our priorities when decisions are crucial.
Diligence - at the end of the day, the ability to stay committed to a plan and adhere to priorities comes from within. It takes willpower and resilience to see through the entirety of a plan. Trust in the process and awareness along the way are essential.
We will see these themes - especially planning and prioritization - throughout the Successful Savings series.
To understand the power of effective planning, let's first discuss where our savings come from.
Cashflow and Disposable Income
Here’s a basic framework, a Personal Finance Identity per se, that embodies the natural sequence of your cashflows.
= Net Income
Less: non-discretionary spending
= Disposable Income
Less: discretionary spending
PYF and taxes are the first two inescapable cash outflows taken directly from gross income. Sure, you don’t have to Pay Yourself First, but you'll pay a hefty price for it in the future. PYF is like a tax that you impose on yourself. The money is not yours - it belongs to your 65-year-old self - and if avoided, you'll pay it in the future with interest!
After subtracting PYF and taxes, we identify our income after deductions - or net income.
Next, subtract non-discretionary spending (necessary expenses) from net income. This includes rent, groceries, and other necessary expenses to live and continue making money. Without these things, your savings goal is not your biggest problem.
Disposable income is the difference between net income and non-discretionary spending. For context, people living paycheque-to-paycheque have 0 disposable income - their necessary expenses exactly equal their net income.
You have two (fun!) options for using your disposable income - spend or save. Ahh, the return of the savings tradeoff from The Financial Responsibility Spectrum.
Spending is easy. Successful saving involves planning.
Back in my first Substack - Savings 101 - I outlined two essential questions for defining a savings goal:
How much money do I need to save?
When will I need this money?
In a simple world, answering these questions can quickly lead us to a savings plan statement that looks something like this:
“I need to save (X)$ by (desired date)."
When considering the relationship between money and time, we may craft a slightly more detailed statement, such as:
“To reach (X)$ by (desired date), I will need to save (Y)$ every (day/week/month/year) for T (days/weeks/months/years).”
Let's use Jerry 👨 as an example. His savings plan statement may look like this:
“To reach $2500 by September 1st, I will need to save $500 every month for five months.”
What do we think? It’s better than nothing, that's for sure! Realistically though, it may not be robust enough for a life of increasing complexity and uncertainty.
Disposable income is rarely ever a constant value, and unless Jerry consistently has well over $500/month in disposable income, this plan may be difficult and unpractical for Jerry.
If Jerry earns a fixed income, an unexpectedly high monthly expense may limit his ability to save $500.
If he earns a variable income, low monthly earnings may also limit his savings ability.
Worse, if he lives off variable income, an unexpectedly high expense AND a low income will compound the problem further.
This $500/month plan is falling apart quickly.
So how can we craft a plan for Jerry that ultimately increases his chances of success?
Subscribe to read the next edition on April 15th!
To Be Continued…
Over the following few editions, we will look at different elements that Jerry can consider when outlining a successful savings plan, from proportionate savings goals to risk mitigation strategies.
Until next time. 👋