How to build a habit of saving and investing

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The most common excuse young people make is that they do not have enough money to save or invest. In actual fact, very few people are incapable of saving money if their money management habit is good. The only exception is that you do not earn any income or if you survive at the mercy of others. Even though you are sinking in debt, you need a savings account for emergency purposes like sickness or job loss. I will elaborate further on this on the post which talks about investing before paying off your debt. Learning how to build a habit of saving and investing is a cornerstone of building your wealth.

Why is it hard to save and invest?

I can think of some few reasons why it may be a challenge to save or invest money. It is crucial to discover why many people find it hard to develop a habit of saving and investing.

You are probably addicted to spending

Most people are not able to save money because they love to spend their money. They just want to get everything they want. Most often they spend on things they do not even need.

How many times can you open your wardrobe and wonder what was going on in your head when you bought some of your clothes? Some will even subsidize their insatiable desire to spend with a credit card or another form of loan. This explains why a large proportion of middle class young people are trapped in debt.

It is all about our status and what others perceive of our taste. We buy things to prove to others that we have made it in life. In the process, we pile up liabilities thinking that we are buying assets. Do you know that your most cherished possessions are liabilities that drain money from you? Think of your gorgeous car or your smartphone – liabilities!

Sometime back, I asked one of my friends whether he was saving or investing money. I recall that time I was looking up to him for advise. His response amazed me. He told me there was nothing left to save after debit orders for debt repayments were processed. Unfortunately most young people are living a life like this – a debt life. People will be having a false impression that you are doing well while in actual fact you are suffering inside.

After this, when you realize that the money is barely enough to pay the bills, you search for a high paying job. The cycle continues after getting a pay rise and you increase your spending.

You may be sinking in debt

Debt is like a cancer that can kill slowly especially if the debt was taken to subsidize reckless spending. It is very difficult to save if you are left with few dollars after the credit man collects his share.

The unfortunate part about debt is that it is addictive especially if you are depending on revolving debt. In most cases, you will realize that you are sinking when you are way too deep. Initially, it feels like the bank is giving you free money for you to spend on your lavish lifestyle.

Debt is often easy to get if you have a good credit score. Sometimes lenders will be giving you offers that are too good to resist. Before you know it, you are left with nothing to take your mom out for lunch. A large part of your income will go towards paying interest on your loan account. You can even be broke before you receive your paycheck (the repayment debit order curse).

This is the reason why it is wise for the young graduates to be more educated about money. It is always rewarding to buy the things you can afford.

Debt is only necessary for the following:

• raising capital for your business,
• buying income generating assets,
• personal development (e.g education or skills development),
• or for emergency purposes (e.g hospital bills).

For more information on how to pay off your debt fast, read the following article:

• Getting out of debt.

Maybe you have poor budgeting skills

Not all people are good at budgeting their incomes. I came across people who have never budgeted their incomes.

Some do not even know how to do it but some can draft a budget they will never follow. Others can draft a budget that is not realistic and they end up spending more than what they budgeted for.

Many do not track small items on their budget which can take a bigger chuck of their income (e.g buying airtime vouchers or a cup of coffee).

A good budget should overestimate expenses and underestimate income. This is called the “Prudence” concept in Accounting. This will give you a cushion against price increases or unexpected turn of events.

One of the terrible budget mistakes I used to do was to allocate expenses before deducting savings. In most cases there would not be enough for that because it always felt like saving was a luxury.

So how do you build the habit of saving and investing?

The answer to this question lies in your ability to have a good habit of investing. You need to feed on the addiction to invest and save money. To get over an addiction, you have to find a better addiction you can live with. Since most people are addicted to spending, savings can be used as an antidote.

1) Use debit orders for your favor

Debit orders are painful if you are paying for your past reckless spending but they can be your best friend if you are using them to save and invest.

There are several savings and investment options which allow you to set a debit order every month from your bank. The first step is to open the saving and investment accounts (preferably an account that restricts withdrawals). Secondly, you activate a debit order that takes a given amount from your bank every month. It will still feel like you are spending money but in this case you are spending on building wealth.

2) Fix a percentage of your income for savings and investments

The time I started working, I made it a policy that a certain percentage of my income will go to a savings account before I deduct expenses.

I borrowed this concept from the bible. The concept of tithing. I realized that most Christian believers pay 10% of their income towards tithe and still manage to survive. I also observed that most people pay for income tax and they will live a normal life after the deduction.

So I tried to find out why someone can survive with 90% of his/her income without ending up being broke. I noticed something important – they budget on what is remaining. I adopted the same strategy and fixed a percentage of savings then I did my budget on the remaining portion. It worked very well and I bought my first brand new car on cash after few months of savings.

Let me give you an example here. Suppose you earn R 10 000 after tax, if you set aside 10% for savings, then R 1 000 will go direct to a savings account. The remaining R 9 000 will be for spending and that is the income you tell yourself that you are earning. When you make your budget, tell yourself that you are earning R 9 000 not R 10 000. I repeat R 9 000 not R 10 000! Your lifestyle should be identical to someone who is earning R 9 000. Treat that R 1 000 saving the same way you treat tax or tithe.

3) Do not change your lifestyle after an increase in income

The time I was doing my honors degree, I was on a scholarship that was giving me a R 4 500 stipend. It was enough for me to buy food, clothes and to send money for grocery to my parents. I was saving everything I was getting from tutoring. Halfway through my master’s degree course, I managed to get a full time job which was paying well. One important thing I did was to continue using the same budget as before. I still continued to be a tutor.

So I used the money I was getting from private tutoring for transport to work and saved all the money I was getting from my main job. Within 9 months of working full time, I had more than R 230 000 in my 32-days investment account (total savings from tutoring and the new job).

With these savings, I managed to take a break from work after a year to complete my master’s degree without lacking anything and I also bought myself a car on cash. So the key point is that you do not have to increase your spending when your salary increases. Just use the extra income for investing and saving.

Conclusion

All in all, I noticed that saving and investing is easy but you just have to develop a great attitude towards it. If your mind is disciplined enough, you can learn to forego the idea of spending on things that do not give you value for your money. The more you save and invest, the more addicted you will become. I recall I was once addicted to saving. At some point, I once saved a portion of the money that was budgeted for food. Sometimes a poor background can teach you to save. It all depends on how you perceive life and whether or not you have a great vision for your future. If your will to succeed is great enough, you will do better on your savings. This is the manual of how to build your habit of saving and investing.

For definitions about investing and saving, please follow this link.