Wealth Building 101: Saving Money Even in a Recession

Sep 15, 2010 by

I've told my sons more times than I'm sure they care to have heard, when it comes to building financial security there are many things to consider but one which will always hold true is this:

It's not how much you make, but how much you keep that counts!

Most people in America simply don't save enough money. Not NEARLY enough in fact. For that matter, one of every four American families doesn't have any savings at all and I'd be willing to bet that another 25% has less than $1000 in savings to their name. 

I think its a good idea to start teaching the concept of saving to children at a young age, I recall being in 6th grade when Miss Diffine, one of my 4 or 5 favorite school teachers, told me something which stuck with me, she asked what I thought was the most important bill to pay every month. I remember thinking 'rent' or  maybe 'taxes' but she said no, its your savings - always pay yourself first

I'm sure everyone knows that they should be saving for any number of good reasons - from preparing for retirement to dealing with emergency situations or an unexpected loss of income and so on, but for whatever reason most just dont do it. It seems to me the most common reason is 'I would like to save but I just dont make enough money to do so'.

In my experience that's rarely actually the reason.

Most people simply lack the discipline and its largely because they have never developed the 'saving habit'. Without creating a ritual of saving, our lives have a way of expanding or contracting to the very edge of our means.  

I realized this dynamic as a young man of about 9 or 10 when my mother had what she described as one of her best paying jobs and we'd recently ended a period of living in a rent free situation for about a year or two. I was aware that we were now paying rent again in our new place, but one day we were in a store and I asked my mother for a toy or something and she said no, because we couldn't afford it.

I didn't say much to her at the time, but I was shocked to hear that we were still basically broke. The situation was something that I considered and analyzed at great length over the years and it ultimately led me to some important conclusions and realizations about how most people handle their finances.

In my young mind during those rent free years I'd felt like we were 'movin on up' because I understood that we were making significantly more money than we had in the past but had significantly lower expenses and weren't spending any extra money that I could see or living any differently than we ever were.

Yet, when that period of prosperity was over, we literally had nothing to show for it. 

I'd always assumed that we too were not saving anything because we just didn't have enough income comin in to do so, but this experience taught me that there's more to it than meets the eye. It also led me to contemplate what happens in the inverse situation - when people have a LOSS of income, I observed that they typically don't starve to death in the street, they make the necessary changes in order to accomodate their newly decreased cash flow.

It's instructional to ask yourself what's happened to people you know who have gone through a time of involuntary income reduction.

I find that when you see someone who is essentially just getting by on their income (at whatever level it may be) and living paycheck to paycheck like most everyone they know, who then takes a 10% or more pay cut - life goes on more or less just like before! They still live paycheck to paycheck of course, but they're certainly not eating dog food or wiping their ass with newspaper or anything.

If a person who was 'too poor to save' then loses 10% of their income and still survives, that means they could have been saving 10% of their previous income all along - they just didn't.

Hopefully now you realize that if you are gainfully employed then you probably CAN save; even if it must be a small amount at first, you'll be surprised at how fast it grows. You'll also be surprised at the feeling of accomplishment that comes with watching your newfound discipline literally pay off.

I'm not a financial professional so my personal methods may not be appropriate for you, but I'll share a few of my general ideas for savings anyway. 

  • I like the feeling of freedom that comes from liquidity, so I have a rule of thumb that states I need to have at least my age in cash available to me at all times, so a 20 year old should strive to have 20k stashed away. For many that's a lofty goal but I found that chasing such a target keeps you focused and you'll be a little less inclined to dip into your savings and thus set yourself back when you know your goal is going to be 1000 farther away come your next birthday!
  • Once I have a sufficient store of cash, I consider investing some of my additional savings to try to get the best return possible, I consider this part of my saving a bit more of a gamble and may take more risk, but I still take 10% of any return from these investments and add it to my main 'nest egg'
  • I don't dip into my savings for purchases. If I want a big ticket item which I can't afford all at once, I start a separate saving for it and wait until I get the cash saved (on several occasions I have found that after saving the cash, I decided I'd rather actually have the cash than the item itself!) before buying the item.

Finally, here are some extra notes I jotted down, some useful tactics to help you get started with your own savings even during a recession when times are relatively tight:

 

Don't wait, start TODAY. No matter how small the amount, its important to start saving right away, but try to shoot for about 10% of your income if possible. There's an old African proverb - little by little, the ants ate the elephant!

Set a savings goal of some type (it doesnt have to be 1k for every birthday, but it should be reasonably challenging for you) and a realistic date that you intend to reach this amount, then set a schedule of savings every month which is going to get you to your goal on time.

Take it straight from your check. Open an online high yield savings account (preferably with no ATM card) and have your savings direct deposited from your paycheck. I like this set it and forget it method but you must keep your greedy hands out of the cookie jar and let it grow! 

Keep paying yourself. When you pay off a loan or car note start direct depositing that payment into your savings for at least 6 months. Also do the same thing for any raises or bonuses or other salary increases. This way your lifestyle and discretionary income remains unchanged while your savings grows at an accelerated rate. 

Get a piggy bank. Keep a change jar at home and empty your pockets into it every night, make sure to pick up any loose change you see during the course of your day. A few times per year take the change and deposit it into your savings account - you'll be surprised how fast that change adds up!

Save your tax return. Set your W4 withholdings during the year to 0 dependents so that you'll get less in your weekly paycheck but (usually) ensure a beefy return at the end of the year. This is particularly useful if you still struggle with consistently saving. The key here is having the discipline at refund time to take 90-100% of that check and put it in savings!

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2 Comments

  1. Nathan Way

    Amir nice post, saw your site on a friends post and thought I would give it a read. I am a financial professional and although I wouldn’t use all the same advise, the points are right on. If most people had your thought process we would all be more financially independent.

    • Thanks Nathan!

      Just trying to share some concepts and practices which have worked for me so far you know? I am definitely not a financial professional though, although I do know a few, so any feedback is more than welcome on this or future finance related pieces I may put out my friend.

      In fact I have some professionals lined up for interviews or guest posts coming soon – if you happen to have anything you would like to share with us just let me know, whether it be a written piece or just some solid tips and best practices that you think would be useful to folks, even at a high level.

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