Money is a supercharged topic for many families and individuals. The economy can be unpredictable and anxiety-provoking for almost anyone. People who have money in the stock market have seen the value of equities rise and decline, but as we all know, that's what the market does - it goes up and down.
And then some younger people struggle to save enough for a down payment on a house due to the rising cost of homes across the country. Young professionals who make a decent salary find it tough to save or pay off college debt.
Foundational financial principles will almost always serve in the end to shore up a shaky or uncertain future. Because the future is what everyone should be thinking about when it comes to financial stability. The cost of aging, helping adult children with college and leaving something behind for family members can seem overwhelming. I will begin with a personal story and then get into the details of who and why some seem to be able to save and others are always in debt.
Research shows a relationship between your financial habits and those of your parents. Preliminary data suggest that people tend to mimic the spending habits of their mothers more than other family members. The amount of money you make doesn't seem to impact whether you are a spender or a saver.
Children primarily learn from modeling, and we all tend to pick up our parents' behaviors even though we may not remember anything specific about our parents' spending or saving habits. This is where my story comes in because I have vivid recollections and memories of my parents' financial attitude.
My parents both grew up very poor in Arkansas, and my mother's father, in particular, was an entrepreneurial dreamer who was happy but always lost money. My mother said that despite his poverty, he loved people, and every business he tried had something to do with people. Rather than tending to the company, he talked to everyone he met - instead of selling.
Both of my father's parents were also very poor, but my memories were of two happy people who didn't lament the fact that they didn't have money. They had their family.
My parents left the South and moved north, where my dad, having finished college, got a professional job and was able to buy us a house and a car. But here is where things got interesting. My parents saved and budgeted all my life. This is how they did it.
We had a “secretary,” a piece of furniture with a lid that comes down to reveal a desk, some small drawers and cubby holes. At the beginning of the month, my parents had envelopes labeled: utilities, gas, food, mortgage and entertainment. Each envelope held the cash for these expenses, and my dad placed the envelopes in the cubbies.
Of course, the entertainment envelope was the one that interested us kids the most. Any leftover money after the other expenditures went into the entertainment envelope.
Our entertainment was usually a trip to a Mexican restaurant to have dinner. That was it. No other entertainment, and we didn't care at all. Oh, and we each also got an allowance - a tiny allowance.
There was no spending of extra money beyond what was in the envelopes. That's the way my parents budgeted. This simple but effective way of budgeting has stayed with me. I don't spend beyond what I make. In fact, I save.
I have invested and have a savings account and CDs. But what is the difference between people who save and those that overspend?
There is no easy answer, but we have some clues, and if you feel trapped by overspending, we have some strategies to help.
Much of our culture and society is based on consumerism. In other words, buying products and goods drives our economy, which is viewed as a positive thing. The media reinforces spending by constant television advertisements, direct mailers, Facebook and Instagram popups. But one of the more significant changes contributing to spending is the credit card.
Total credit card debt for the first quarter of 2022 was $841 billion. And companies like Amazon have developed a system that is convenient, fast and so easy to part with your money.
The other reason we spend is that it feels good. Chemicals such as dopamine, endorphins, serotonin and adrenaline can be released when anticipating pleasure. For example, dopamine is called the “happy” hormone, and you have a higher chance of spending more than you would when you shop online versus buying something in the store because dopamine levels from purchasing online are more elevated. Even waiting for your package to arrive in the mail spikes dopamine levels in your brain.
Everyone has to spend money, and the necessary expenditures usually revolve around housing, health care, education and children. And some research shows that when people spend on experiences rather than on things, they are happier.
Every generation from millennials, boomers and Gen X has different challenges influencing spending. For example, millennials carry a lot of student debt, and many millennials and Gen Z can't afford to buy a home due to rising home costs and interest rates.
Boomers are considering retirement and how to pay for future care needs while leaving an inheritance for their children. Some boomers are selling their homes at the top of the market and choosing to rent.
Configuring budgeting and saving can be challenging under ever-changing economic conditions, but you can do it, and it is never too late to start. The pain of withdrawal from overspending could be significant, but the reward of knowing you are working toward a solid financial future- is priceless.
The psychology of saving is not that different than any other habit that is hard to start - for example, exercise. When you begin to exercise, it is painful until two things happen - once you see the benefit and No. 2, it becomes a habit.
Endure the pain to get to the point where saving is as pleasurable or fun as spending. I know people with solid financial situations who love finding bargains, budgeting and investing wisely. Here are some tips and tricks to get you started.
A financial professional can review your income, expenses and goals. They are invaluable in giving you strategies to plan and pursue your goals for the future.
Automating transfers to a savings account or money market is a great way to save without going to the effort - and prevent the possibility of getting derailed. After a while, you won't even notice the money coming out of your account, which will continue to grow. Check with your bank or credit union to see if this is possible, and some apps will do the same.
Inflation takes a bite out of everyone's income. Shop wisely. Consider purchasing in bulk to reduce trips to the store (and gas costs) and pay less by doing so. Look for sales and coupons.
Use a cash back credit card but make sure you pay off your credit card balance each month. You can set up your credit card to automatically deduct each month's payment from your checking account.
Restaurants are expensive, especially if you order alcohol. Consider alternatives like ordering takeout for lunch to have for dinner. It is less costly that way.
Credit card debt is a revolving budgeting nightmare. Pay off your credit card debt no matter how long it takes, and don't incur it again. One strategy is to reduce the number of credit cards you have to two. You might, for example, have an American Express cash back card and a Visa or Mastercard for places that don't accept American Express.
Online shopping is very enticing and can wreck your budget. One way to control the urge to order is to wait 30 days or so before making the purchase.
For example, you can “save for later” on Amazon or place it in your cart but not make the purchase. Delaying the purchase gives you time to cool down and let your hormones reach normal levels. By the end of the 30 days, you may no longer be interested in the item.
Consider refinancing the loan at a lower rate if you have an auto loan. Shop for competitive insurance prices. Yes, it takes time, but it can save you over the long run. Shopping for lower prices at the pump and driving only when necessary will help.
Try to combine trips and check your gas mileage. It could be your tires or some other maintenance issue if it seems high. Some employers are permitting remote work to take advantage of not driving to work.
You may have noticed that your cable and internet bill continues to climb inch by inch until the price you started at seems like a distant memory. Review your usage.
You may be paying for channels that you never use. Or, you could consider cutting cable altogether and subscribing to a streaming service. And don't hesitate to negotiate your cable bill if you want to keep your service. A threat to leave is sometimes all it takes to get a reduction.
Switching your cell phone plan could seem like a hassle but could save you quite a bit. And you may get a new phone in the process. If you own your own business, ask about a corporate rate that can be substantially less than an individual plan.
Reducing your utility and water bills will take a concerted effort to see where there is waste. Our dad instilled in us the value of not wasting. He constantly reminded us to turn off the lights in any room we were leaving.
Reduce heating and cooling costs by adding insulation and checking for air leaks, and if you have ceiling fans, make sure they are going in the right direction for the season. Install a smart thermostat to set the heat and cooling according to your usage. It may seem quaint, but our dad always said, “if you are chilly, put on some extra clothes!”
Water usage is an important consideration because large areas of the U.S. are under drought conditions. Consider removing the lawn (like they are currently doing in Las Vegas) and adding a drip system with plants. Water late at night or early in the morning to maximize moisture retention.
Do you receive magazines and online publications that you barely read? Think about whether they are worth the cost. If you have a city library card, the library often offers a digital section where you have free access to The New York Times and The Wall Street Journal.
They may even provide your local paper - all for free. If you have signed up for a free trial of something, make a note in your calendar when the billing starts so it doesn't slip your mind and months have gone by and you are still paying.
Talk with your financial professional about refinancing your mortgage. Calculate the advisability of refinancing to possibly save several hundred dollars a month.
Your financial professional can help you set savings goals for the areas that make the most sense. It could be credit card debt, the purchase of a home or a long-range retirement goal. Setting goals allows you to stay on track and measure how you are doing.
The idea of tracking spending may seem obvious, but not many people do it. Every month check your banking account and credit card statements to review your expenditures. Another unrelated advantage of checking your accounts is monitoring any unusual activity.
Remember my parent's secretary with the envelopes? That was a simple way of budgeting. Set priorities for spending and, of course, reconcile spending with your income.
One rule of thumb is to have one year of your income in savings. Why? What if you lost your job or had a major medical event?
Patience is the critical ingredient for financial stability. You will be rewarded in time with substantial savings and a healthier financial future by doing all of the little things. It is challenging to stay focused and committed initially, but the process will eventually be self-reinforcing.
We have sophisticated efforts to entice us to spend, but we also have sophisticated methods to help us save. Putting money in envelopes in the secretary as my parents did doesn't make sense in today's world, but its principles still do.
Alliance America is an insurance and financial services company dedicated to the art of personal financial planning. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.