Session 2. Making Saving Easier

Unless we pick our parents very carefully, or win the lottery big time, the surest way to have something to invest is through saving, whether from employment income, stock market gains, or business profits. Yet saving must be perceived as not worth the effort in the US, for we do very little of it. The exhibit shows how low American savings rates have gotten in the 1990's. Only during WWII were they as high as in many Asian countries today. We in the US are more like the grasshopper that lives for the summer than the ant that builds up supplies for hard times.

The data for the chart are from the US Dept. of Commerce Survey of Current Business. (Beginning in the first half of 1999, the US savings rate entered negative territory, a symptom not seen since the great economic depression of the 1930's, but coming at a time when prosperity was still high. )

A penny saved is a penny earned. Benjamin Franklin said much of what there is to be said about saving. No arcane knowledge is required to understand how to make it easier to save. People interested in personal investing do not lack for food and shelter. We don’t save because we don’t take advantage of the little strategisms financially prudent people have discovered for us.

Strategy 1. Get in touch with financial reality. Think about how much money you will need in the future even if things go well. Then remember that the world may not always be as rosy as it seems today.

Strategy 2. Stretch your income by creating your lifestyle more efficiently. If you are just in the early stages of wealth accumulation, use home equity loans rather than consumer debt to take advantage of tax deductibility. Pay off your credit card debts and participate fully in tax-advantaged savings plans. Try a home budgeting computer program to check whether expenditures are spent on priorities. My wife Linda loves Quicken, because it tells her exactly where she is financially. Treat yourself to little luxuries but avoid the big ones with low payoff.  There are different applications, but the same principles if you are already affluent. Take advantage of more elaborate tax-deferred opportunities if you are so inclined, but one of the biggest is simply nurturing your unrealized capital gains so that more capital is available for growth (more on taxes in Session 8).  Avoid owning the largest house, any airplanes or the largest boat in your set!

Unfortunately, some of us (most of us?) cannot bear budgets as a daily discipline. Never fear! We can tackle the problem of saving more in an indirect fashion.  One way is to sneak up on ourselves by changing our environment rather than our personalities....

Strategy 3. Pick your friends and community carefully. If your friends spend with no thought of tomorrow, then you will, too. If your friends have far greater incomes, it is a sad fact that you can't keep up without injuring your financial health. It is said that savings rates are inversely related to time spent watching TV. Maybe watching the lifestyles of the rich and famous is not a good idea. (And if you already are rich and famous, why bother?)

An alternative is to use our own psychological weaknesses to help us -- Think of the analogy in other areas -- I keep my watch a few minutes fast to help keep me from being late to appointments. Sounds silly, but it works!

Strategy 4. Use habit and compartmentalization to advantage.  Habit makes it much less painful to slow down the increase in your spending than to actually cut it. Mental compartmentalization helps put ready availability of spendable cash out of mind.

Start a savings habit by putting 5% of your regular income in a savings account or mutual fund purchase program that is deducted from your income before you get your paycheck. Whenever you get a substantial raise in salary, or your ship comes in, increase the savings fraction.

Lean toward jobs that pay more in annual bonuses – Assuming part of the risk of your compensation sometimes makes it easier, not harder, to save.  It is easier to save a large fraction of whatever bonus you can earn than of your regular income because uncertainty has caused you not to build it into your lifestyle habits.

Mental compartmentalization will help you forget that the money is there to be spent.  Again, the same principles apply if you are already affluent -- only the compartments may change.

The key concept of this session is that there are two ways to save -- the hard way and the easier way.  The hard way is rational planning and budgeting.  Some people do this well and actively enjoy it.  But the rest of us need to do an end run rather than charging straight ahead. It is easier to change your psychological environment than your personality.

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