If saving money is your top priority, you’ve probably been advised numerous times to cut down on small expenditures. The common wisdom is that these small savings will add up to large ones over the course of a year. For example, if you save $20 a week on eating at home instead of in a restaurant, by the end of the year you’ll have saved over a thousand dollars. Sounds great, right?
The problem is that the small-savings strategy doesn’t work for many people. Are you one of them? You skip the coffee and snacks, never eat out, and hardly drive anywhere unless you have to. But no matter how much you scrimp and save, you never seem to have any more than usual at the end of the month.
If this sounds all too familiar, you may be making a common error when practicing the small-savings method. This error is two-headed:
- Failing to track your small savings
- Keeping your savings in the same account as your regular spending money
The bottom line is that in order for the small-savings method to be truly effective in the long term, you must track how much you’ve saved and you must immediately set the money aside.
This doesn’t mean mentally setting money aside. This doesn’t even mean writing down how much you saved. This means physically transferring the saved amount—whether it’s $2.50 or $99—into a separate account. Make a transfer every single time you forego an expenditure; if not immediately, then at least by the end of the day.
Is this really necessary? Isn’t just keeping track of your small savings sufficient? No, it’s not. Here’s why.
- The amount of money you spend usually equals the amount you have available. By keeping your small savings in the same account as your spending money, you subconsciously give yourself permission to spend all of it. If you carefully save $40 in dollar increments over a two-week period, but then spend the money on something else, you miss out on reaping the benefits of your frugality. So, keeping track is a good start, but in order for it to be beneficial in the long term, you must follow through with the next step. Take a few seconds at the end of each day to transfer saved money to a separate bank account. You’ll have a clear idea of how your small savings are adding up over time, and you’re far less likely to spend the money.
- Denying yourself small expenditures all the time cultivates a poverty mentality. Do you take an unrealistically extreme attitude to the small-savings method? Instead of cutting back on specific areas of spending, you commit to cutting out all spending. When you do make an unnecessary purchase, you feel guilty. Then you spend more to make yourself feel better! This binge-and-purge approach doesn’t help you gain control over your finances: it just makes you paranoid and stingy. By contrast, when you choose to spend occasionally because it fits into your budget, you feel good and you cultivate a wealth mentality. For example, you can set a concrete goal of skipping your weekly movie rentals until you’ve saved $50, and then treat yourself to one movie when you hit your goal. Transferring your small savings into a separate bank account allows you to develop a healthier and more effective attitude towards budgeting.
- It’s psychologically rewarding to pay debts from a separate account. When you’re living on the edge, it’s easy to think that you’re so in debt you’ll never catch up. This despondent attitude makes it challenging to motivate yourself to save small amounts. Transferring money into a separate account is especially important in this case. That way, when you need to empty the account to pay bills, you clearly see the concrete results of the cheaper route you drove, the coffee you declined, or the pair of jeans you went without. Think of the amount of money in that separate account as the amount of credit card debt you avoided! Even if the money is set aside for only a few days before you need to spend it, it’s enormously satisfying to perceive a direct connection between saving and spending. As you gain control of your finances, you’ll already have the habit of saving and can smoothly transition to long-term saving.
- You can reduce your credit card debt more effectively. What if your main priority is to pay off your credit card debt? In that case, transfer small savings into your separate account only until you’ve saved enough to make your monthly payment. Then, continue to track your daily small savings as usual, but instead of transferring them to the account, make a credit card payment in that amount immediately. Yes, even if the payment is only one dollar! Most credit card companies provide an online payment service, so making a daily payment will take just a few moments. Your credit card balance will steadily decline, your interest will decrease, and you won’t risk emptying your savings account before the end of the month.
By tracking how much you’ve saved and immediately setting the money aside, you’ll find that the small-savings approach works better than you ever thought it could. Whether your goal is to eliminate debt, build a nest egg, or afford a specific purchase, small savings really do make a huge difference.