The Three Elements: Saving

Last week we wrote about the three elements of money mastery: saving, earning, and investing. We also talked about how it’s important to master saving first, as it forms the foundation of successful personal finance.

Personal finance is like a boat: it’s pointless upgrading the engine unless you fix the leaks first. It doesn’t matter how high your income is if you don’t manage to hold onto any of it. And being an investing genius is useless if you don’t have any money to invest.

​Saving could just as easily be called spending. They are two sides of the same coin. In order to save, you have to spend less than you earn. Being good at spending is spending as little as possible while still meeting your needs and being happy.

The key of course, is being aware of your needs and what makes you happy.

I used to be an awful spender, and an even worse saver. I would regularly run out of money each month, sometimes having to borrow from friends in order to eat. This remained the same even as my income grew through doing part-time work and changing jobs.

Then I got better.

I think there are a few things that can help you get better at spending:

Have a goal

My goal is financial independence, but it could be a more achievable one like saving up an emergency fund or putting money away for children or retirement.

​Without a strong goal, you have no reason to control your spending.

Pay yourself first

This is the single most useful thing for me. The reason most people don’t save more is because they treat it as optional: they will save any money they ‘have left at the end of the month’ and of course at the end of the month there is no money left.

Instead treat saving the way you treat your electricity bill, as something that needs to be paid immediately and without question. Start small, maybe putting 1,000 yen a month away, and slowly increase the amount as you get used to it. Take the money out of your account on payday and move it to your saving or investing account. Don’t move it back.

If you manage to increase your income, try to put some or all of the increase towards your savings.

The best thing about this is that it means you don’t really have to budget, as you can spend anything you are not saving.

Be aware of your spending

It’s incredibly boring, but quite useful to track your spending for a month or so. Doing so longer term can also be useful.

The easiest way to do it is to use an app, particularly if you are able to do most of your spending with a credit card and link the card to the app so your spending is sorted into categories automatically. I recommend Moneytree.

The benefit of this tiresome exercise is to notice what you are spending money on. A lot of the time, you will find areas where you are spending much more than you thought you were. Sometimes with a bit of reflection you may realize that you don’t actually need to spend money on some things as they are not making your life better.

Try to reduce large or regular expenses

The biggest expenses for most people are housing, transport, food, insurance, and communication/entertainment. These payments are also regular and ongoing, so if you manage to reduce them you will enjoy the benefit of those savings every month.

This is a much better strategy than trying to cut back on coffee or nights with friends, particularly if coffee and nights with friends make you happy.

Moving to a smaller/cheaper place, moving closer to work, getting a smaller car or getting rid of a car, finding ways to buy healthy food in bulk, shopping around for insurance/mobile/internet can make a huge difference to your outgoings.

The final destination

You want to end up in a situation where you are not spending all of your income, but you’re still happy and content with your lifestyle.

Ideally you would not want to spend any more money even if you had it.

If you make it to this happy place you are ready for the next two elements. We’ll discuss them in future blog posts.

How about you? Any good saving tricks? Did we miss anything?