Living paycheck to paycheck can be quite stressful. As a result, people are constantly on the lookout for ways to avoid taking their bank account down to the final few pennies by the time the last bill is paid each month. As working more hours or getting a higher-paying job is not always possible, people often try to save more or control their spending to get ahead. But which is actually the better option?
Saving money is better than controlling spending as a means of getting one’s financial affairs on the right track. While both are very important—and closely related—in the grand scheme of financial health, saving should be thought of as “spending on your future,” thus giving it priority over simply spending less.
As mentioned, saving money and controlling spending are closely related. If you control spending, you put yourself in a position to be able to save more. However, you should still be able to spend on the things you enjoy if you make spending on your future (saving) the top priority in your monthly budget.
Benefits of Saving Money vs. Controlling Spending
Saving money is important in terms of accumulating a nest egg for future use. On the flip side, while cutting spending limits what you can enjoy in the here-and-now, the decision to cut down on superfluous items will give you more budgeting agility in times of need.
From a psychological perspective, saving money is a better option because you are actively growing something, whereas controlling spending may lead to some sentiments of deprivation. However, if controlling spending is done correctly, it can take place without sacrificing too many of the things you enjoy.
Although saving money can benefit you in many ways, depending on your situation, simply controlling your spending—or both saving methods—may be the better option. The following breakdown will look at how saving money and controlling spending can lead to total financial health and how to effectively implement each into your financial life.
How to Save Money Most Effectively
Saving money is one of the most important actions you can take on the path to financial freedom, but the traditional approach to saving is completely backward. Most people look at saving as something that takes place with the money that is left over each month. They pay their rent and all of their bills and then try to build a nest egg with what remains.
Many times, this remaining sum ends up being quite paltry, which leaves the saver disillusioned. Why even bother saving when there is less than $100 leftover?
To break from this vicious financial cycle, saving—or spending on your future—should be the first line item on your budget each month. That’s right: even before paying your rent, utilities, or insurance premiums, the first thing you should do each month is “pay yourself.”
How Much Should You Save?
Many financial advisors recommend saving $500 each month as a baseline amount to help you reach your financial goals. However, this may be too much or too little, depending on the type of lifestyle you are saving for. A better figure may be to put aside between 10-20% of your net pay each month.
Even after committing to “paying yourself” first, it is important to have a structured approach to saving. Simply sticking cash into the vault each month will not help you reach many financial goals, as the cost of inflation (roughly 2% each year) will actually make your cash lose purchasing power over time.
Therefore, your savings each month should be split between low-risk, moderate-risk, and high-risk savings instruments. The degree of each saver’s risk tolerance will influence how much of the monthly savings go into each, but all savers should contribute at least something in each category.
Low-Risk Savings Instruments
Low-risk savings instruments will not grow your savings very much, but they offer an extremely high degree of security. Checking accounts, savings accounts, certificates of deposit (CDs), and government bonds are examples of low-risk savings instruments.
Checking accounts and savings accounts are extremely liquid, making them good savings options for your “rainy day” money. CDs and bonds will have variable maturity dates, with some CDs maturing in as little as a few months and some government bonds maturing in 30 years. The longer you wait for maturity, the higher the interest paid—a trade-off from the liquidity of checking and savings accounts, which pay negligible interest rates.
Moderate-Risk Savings Instruments
Moderate-risk savings instruments are those that will grow your savings more aggressively than low-risk options. Although the risk is greater with this type of savings, most moderate-risk savings instruments still have a very low chance of failing.
Exchange-traded funds (ETFs) are the most popular places to put money in this category. These instruments track a particular index, such as the Dow Jones or Nasdaq, and give investors a yield commensurate with the gains or losses of the index itself. While there is some volatility, the markets have historically averaged a yield of around 8% annually.
Other instruments that could be considered moderate-risk include real estate investment trusts (REITs) that pay investors a regular dividend and stocks in mature companies that are “too big to fail,” such as Wal-Mart, Amazon, Apple, etc.
High-Risk Savings Instruments
High-risk savings instruments are those that have a real chance of causing the saver to lose substantial principal investment but also offer the upside of multiplying the investment many times over.
Cryptocurrency is the most popular high-risk investment in 2021, with even the biggest crypto naysayers agreeing that it may be a good idea to put 1% of your savings into strong crypto projects. Other high-risk instruments are individual growth companies that have yet to firmly establish whether their business will succeed, with innovative technology stocks being a prime example in this category.
How to Control Spending Effectively
Although saving money should be given priority over controlling spending, you may find yourself in a situation where you save the first 10% of your pay each month and cannot pay all of your bills. When this is the case, it is time to start controlling spending.
Controlling spending is difficult for most people. After all, it is important to enjoy life and not just sit on a pile of money indefinitely, and some of the nicer things in life cost money. Fortunately, there are several creative ways to get your spending under control that will allow you to save aggressively and still maintain a lifestyle similar to your accustomed level.
Check Subscriptions
Studies have shown that people grossly underestimate how much they spend each month on subscriptions, with the average American spending close to $250 each month for subscription services. Subscriptions are particularly lethal to those trying to control spending because they recur automatically each month, making them a sort of invisible charge.
While some subscriptions, such as cell phone service and Wi-Fi, may be considered essential items in the budget, many types of subscriptions can—and should—be trimmed. Some examples include:
- Monthly car wash passes
- Clothes and beauty club memberships
- Gym and fitness memberships that seldom get used
- Subscriptions for discount clubs, which are becoming increasingly popular among fast-casual restaurants: For example, a monthly subscription of $9.99 gets you $2 off all orders. However, you would need to eat out way more than you think to make this a good deal.
Get Rid of the Car Payment
It is easy to fall into the trap of thinking of a car payment as a necessary expense. In American culture, nothing signals status quite like the car you drive.
However, there is a reason that noted personal finance guru Dave Ramsey refers to car payments as “the stupid tax”: putting a significant chunk of your monthly income into a car is almost always a bad idea.
When trying to get on the right path financially, it is better to purchase a used car that you can pay for in cash. As long as the vehicle is safe and can get you from point A to point B, it is better to sacrifice style points now for the financial freedom it will offer in the future.
Don’t Buy on Credit
Credit cards have notoriously trapped millions of people into thinking they are better off financially than they actually are. The “get now, pay later” mindset has caused mountains of debt that many households simply cannot overcome.
A simple way to solve this is to not buy anything that you cannot pay for using your specified cash wallet. If you want to purchase on credit to keep your credit score strong, never let your balance run above the figure that you can pay in full each month.
Conclusion
Although they are closely related, saving money is slightly more important than controlling spending on the path to financial health. By “paying yourself first” or “spending on your future,” you can put your money to work for you and put yourself in a strong position to meet your financial goals as they arise.
If you find that your increased saving efforts are making it difficult to meet your monthly commitments, then you need to look into ways to control spending. Ideas such as limiting your subscriptions, getting rid of your car payment, and avoiding buying on credit are great ways to take a chunk out of your monthly expenses without sacrificing too substantially.
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https://www.ramseysolutions.com/budgeting/the-cure-for-excessive-spending