Are you a natural-born saver or a natural born spender?
If you’re like me and you find it difficult — even unnatural — to hang onto your money, it might help to reframe how you think about saving.
Browse any personal finance book or blog and you’ll quickly see the same two boring things you “should” be saving for:
An emergency fund.
To me, it’s no wonder so many people don’t have any savings and many more of us find it hard to save even when you want to.
The goals are boring and meaningless.
Savings means sacrificing the discretionary dollars you have — which are often few to begin with — to meet these potential future needs. When that sacrifice means making changes that aren’t always pleasant, like giving up meals out, canceling cable, or even taking on a roommate, it’s human nature to drag our feet and put off saving for another month.
Here’s a cure
First, figure out how much money you need to live for a year.
If you didn’t have to work, how much money would pay the rent, your bills, and provide enough “fun money” to keep you happy? That number is going to be different for all of us, and it may be more or less than your current expenses.
Remember, this is hypothetical. Perhaps you’d live in a house that’s bigger or smaller than your current pad. If you didn’t have to work, perhaps you’d drive a lot less.
Now, divide that number by 52.
The result is the amount of money you need to save to buy one week of freedom.
If you need $20,000 to live for a year, you need to save $385 to buy a week of freedom. If you need $50,000 a year, you’d need to save $961.50.
Once you have this benchmark, you can look at your existing savings in “weeks of freedom”.
Suddenly a modest savings goal of $5,000 gets more exciting, because if you decide you can live on $20,000 a year, that $5,000 can buy you 13 weeks (three months) of time.
That’s time to find a new job if you get laid off, time to travel around if you take a sabbatical, or the beginning of retirement — that time when you’re finally free to do whatever the hell you please.
This is a crude estimate. The good news is, thanks to compounding interest, the more you save, the less you have to save to buy an incremental week of freedom.
Takeaway: More than anything else, saving is about creating freedom
This is what having an emergency fund and retirement account is about: the freedom to spend your time how you choose.
If you lose your job and don’t have savings, you’re anything but free: You have to scramble to find new work and rely on government unemployment checks in the meantime.
And if you don’t plan for retirement, you neglect yourself the option of one day being free to choose not to work. Who knows: you may still want to work, but at least you won’t have to.
I know several people who are “semi-retired”, even in their 30s! That simply means they’ve saved enough to enjoy the freedom to make careful choices about how they spend their time. They still work, but perhaps they work part-time and on their own terms. They’ve purchased personal freedom by smart saving.
There is a downside, however. Others will become suspicious, even disdainful, as they wonder what you’re doing with your time or why you don’t have a “real job”.
I find it best to ignore the haters; they’re just jealous. Who wouldn’t be?