Saving money is a fundamental financial skill crucial in securing one's future financial stability and achieving financial goals. Unless you inherit a large sum capable of supporting you and your lifestyle, the responsibility lies entirely with you. However, despite its importance, many people need help saving money effectively. In this article, we'll explore some common reasons people fail to save money and provide insights into overcoming these challenges.
Lack of Financial Education
One of the primary reasons people fail to save money is the need for more financial education. Many individuals are not adequately taught about budgeting, saving, or investing from a young age. With the necessary knowledge and skills, people may find it easier to create a realistic budget and save consistently. When I was in elementary school, we were taught basic financial education, like how to budget and save, we were taught how to write a check and were taught about checking and savings accounts. In high school, I took a home economics class where my teacher took a deeper dive into running a household and trying to be budget-conscious when shopping for groceries, etc. Financial education was no longer a part of the curriculum when my girls were in school. I remember teaching them to write a check in high school and being surprised they weren't taught in school.
This is a topic for a different newsletter. Still, it is not surprising that we have the student loan debt crisis when our students can borrow hundreds of thousands of dollars with no financial pre-education requirement before signing on the dotted line, on top of the lack of financial literacy education in schools. I understand there is a push to reintroduce financial literacy in schools, but until then, the responsibility falls on us to learn and, most importantly, teach.
Beyond the basics of checking and savings, to learn the more confusing and complicated topics such as employee benefits, health savings accounts, 401(k), 403(b), IRA, Roth IRA, and so on, you are really on your own to do your research unless your human resources department works hard to educate you.
Solution: Several good financial education resources are available to read or listen to. For example, the Ramsey show is a great way to learn financial and budgeting basics. Our clients need to understand how their money works for them, so we work very hard to teach them about investing, budgeting, and saving via client meetings and our monthly newsletters. I would love to know if you would be interested in us doing an introductory financial education webinar for you or your friends and family. Please email me and let me know.
Living Beyond Their Means and High Debt Burden
Living beyond one's means is a common trap that leads to financial instability. People who consistently spend more than they earn often struggle to save money because there's nothing left to save after covering their expenses. I am sure many of us have experienced seasons of living beyond our means and trying to "keep up with the Joneses." I know that I certainly have. But the sooner you recognize that and change, the better. Living beyond your means creates a vicious cycle and trap of either depleting savings to cover debts, and/or not even saving at all. When we interrupt savings, that robs us of years of compounding growth, but when we get in trouble and must use our valuable savings to pay off debt, that adds insult to injury.
We believe that creating a detailed budget and tracking expenses can help individuals identify areas where they can cut back and save more. Going through everything and writing it down is a very eye-opening first step to fixing the problem. Living within our means is critical to building a solid financial foundation.
Mounting debt, especially high-interest consumer debt like credit card balances, can make saving money daunting. Debt payments consume a significant portion of one's income, leaving little room for savings. The lack of increasing your savings is the opportunity cost of servicing debt.
Solution: The best way to prevent this is to create and follow a written budget. It is simple and straightforward. Aggressively pay off your debt.
Lack of Clear Financial Goals
With clear financial goals, it's easier to stay motivated to save. People may need help to see the purpose or benefit of setting money aside. You must check in with yourself frequently to see if you are on track. Priorities change constantly; unexpected expenses arise, and our health and job status can change. Our goals will also change with the seasons of life. The more we check in with ourselves about our plans and priorities, the easier we can handle the changes.
Solution: Define specific financial goals, both short-term and long-term. These goals can be for emergencies, retirement, buying a home, or taking a dream vacation. Having particular and written objectives can provide the motivation needed to save consistently.
Procrastination
Procrastination is a common roadblock to saving money. People often need more time to save, thinking they'll start later when they have more income or fewer expenses. Unfortunately, the longer one postpones saving, the harder it becomes to accumulate wealth.
Solution: No matter what your age, start saving now, no matter how small the amount. The power of compound interest means that even modest contributions can grow significantly over time. Establishing a savings habit is more important than the initial amount saved.
Start now. Don't delay. Do not procrastinate. There is no other solution. Let us help you.
Unexpected Expenses
Life is full of unexpected events, such as medical emergencies, car repairs, or home maintenance. These unforeseen expenses can quickly deplete savings or prevent people from saving in the first place. Or the costs expected can compound and grow out of control! For example, we recently underwent a home renovation that was unexpected but necessary. And, due to unforeseen circumstances, we incurred MORE necessary but unexpected expenses. And NOT small ones. This has caused a significant change in my cash position, and aside from regular saving for retirement, I can only restore my cash to a level I am comfortable with for the foreseeable future once these things are completed. It happens to everyone, even the best budgeters and savers. The only thing you can do is get back to saving as soon as possible.
Solution: Create an emergency fund and sinking funds. Having a dedicated fund for unexpected expenses can provide a financial safety net, allowing individuals to handle emergencies without derailing their savings efforts.
Lifestyle Inflation
As people earn more money, they often succumb to lifestyle inflation by increasing their spending on non-essential items. This is also known as lifestyle creep. It may be small, like a little more on your grocery bill or a mani-pedi you would not usually pay for. Or it may be larger, like more expensive upgrades that are unnecessary, but a luxury, like more expensive clothing purchases or items for your home that are unnecessary. Not only does this keep you from getting ahead of the game and supercharging your savings, but this habit can lead to a perpetual cycle of living paycheck to paycheck.
Solution: Resist the urge to inflate your lifestyle with every pay raise or windfall. Instead, channel additional income into savings and investments to secure your financial future. Invest your raises and bonuses. Set a reasonable amount to enhance your lifestyle, but set a limit, save, and invest the rest.
Conclusion
Saving money is crucial to achieving financial security and reaching your goals. Understanding and addressing why people fail to save money can help individuals build better financial habits and secure a brighter financial future. By educating themselves, living within their means, setting clear goals, and avoiding procrastination, individuals can overcome these challenges and embark on a path of successful saving.