I want to congratulate you on taking this savings challenge. By taking action on this, you have already done more than most people will in their life. According to Entrepreneur, two thirds of all Americans are living paycheck to paycheck.
I used to always have money troubles. I would have a temporary relief when I made more money or got a raise, but I would always end up back where I started. The truth is that you cannot take control of your finances until you master savings (aka living below your means). There is always a bigger TV, a more expensive card and a bigger house to spend your money on. The only thing that changes, as you make more money, is that your job thinks they own you because they pay you more.
What is a challenge? Typically, a challenge is used to psych yourself up to suffer in exchange for making as much progress as possible, in a short period of time. That’s not a great way to get something done. The problem is you will eventually associate the thing you are striving for with misery, and as soon as the challenge is over, you will bounce back and be even less likely to do that thing. Why do you think so many people lose weight during diet challenges, only to immediately gain it back shortly afterwards?
What we want to do with this challenge is to create a sustainable change in your lifestyle that incorporates living below your means. I want you to view saving in a positive light. After all, you should see saving as a good thing. It can lead to more confidence, fun life experiences, financial security, realizing your dreams and even getting rich at a younger age.
The steps on this challenge should be done in order and once you finish one, you should start the next one. You can take as long or as little amount of time for each step.
Are you excited? I hope you are getting at least a little excited. What we are about to do here is change your life for the better, forever. For your part, all you have to do is make a commitment to make it through the six steps.
1. Separate your savings from your finances
When your savings and spending money is combined, it becomes very easy to accidentally spend your savings. In this step, we will put your saving money into a bucket that has a purpose, and you don’t touch that bucket unless it is for the specific reason that the bucket exists.
In addition to separating out the money, we also want to make your savings a little harder to access. If the temptation to spend the money comes up, we want a cool off period of a day or so to rethink your decision.
For step one, you will pick a savings account, that is a different institution than your checking account, and deposit $1 into that account. Going forward, all of your savings money goes into that account. Once that is done, you can move onto step two.
Five higher yield savings accounts
Live Oak Bank – %60 APY
Vio Bank – %57 APY
Quontic Bank – %55 APY
Ally Bank – %50 APY
Marcus by Goldman Sachs – %50 APY
2. Create your first savings goal
We need to create a positive association with saving money, and the first step in doing that is creating a goal that clearly links the money in your savings account to a something concrete. We are going to start small with this one. I would like you to pick a fun goal that is $100 or less. It will be different for everyone, but here are some ideas:
- Buy a nice piece of clothing
- Go out to an expensive restaurant
- Take a day trip
- By an expensive bottle of wine
- Browse an under $100 gift list and pick one out to buy as your goal
The other reason we want a goal is to help with temptation. When you have a large pile of money sitting there, and you see an impulse purchase that you want, it becomes very easy for your impulse purchase to become the goal of that money.
Once you save up and make the purchase for your fun goal. Move on to step three.
Did you enjoy hitting your first savings goal? Hopefully, it started to give you a taste of what is possible when you make the switch from being a spender to a saver.
For the next steps, we need to find more money to save, so we can supercharge your savings efforts. The number one way to do this is by budgeting.
For this step, read our guide to budgeting. Sign up for budgeting software and identify areas that you can cut back in. When identifying areas to cut back, shoot for the categories that you are spending the most, because that is most likely going to be the easiest place to find items to cut from. What we want to come away here is for cuts that will lead to extra money saved each paycheck that will go into your savings.
Don’t try and cut everything at once. Check out your spending each week and make incremental cuts to slowly build up the amount you are saving.
Lastly, for almost everyone, food is a top three spending category. Check out these tips for saving on groceries in order to find some easy ways to save.
Once you are saving more money than you spend each paycheck, move onto the next step.
4. Segment your savings into categories
We are going to segment your savings into three categories. After each paycheck, you will choose goals for each category and assign money to each of these buckets.
This category is for anything that brings you enjoyment. It can be as simple as going out to eat, shopping, or going on vacations.
You want to create concrete fun goals for this category. Part of the power of saving money is it creates the ability to create better experiences through delayed gratification. Why not experiment with some more lofty, fun goals. Do a travel experience, buy a nicer TV or other big ticket item that would not have been possible to do in the past.
For this category, it includes everything related to financial security and your eventual early retirement from working.
The first place you will allocate money, in this category, is creating an emergency fund of three to six months expenses. An emergency fund will protect you from disaster, if you run into a medical issue or lose your job. It will also make you more confident to make bold financial moves, like quitting your job and getting a higher paying job.
We have a strategy to invest the emergency fund money to allow it to grow, but also make sure as much of the money as possible is available if it is needed. Once you save three to six months of expenses, the invested emergency fund money will actually become an asset for you, making money each month. You should be able to calculate how much emergency fund money you need via your budgeting app that you are using.
The next place the money will go is to pay off loans that have an interest rate of 5% or higher. For anything lower than that, the money can likely make more for you by investing.
Lastly, the money will be invested. The investment type can be anything that grows your money. The stock market, real estate and crypto are all valid options. It would be best to diversity between the investment types.
If you follow the advice outlined here, then you are going to be a multi-millionaire by the time you retire. What big bets are about is shortening the timeline to become financially independent. What you are going to do here is swing for the fences. You may strike out a couple of times, but sooner or later, one of the big bets will pay off for you.
A friend of mine invested in Dogecoin, a highly speculative investment. She bought it at less than one cent and sold it at .71 cents. How much money do you think she made? Not much, because she knew that she could lose all the money and $100 was all she was willing to risk. Had she invested $10,000 she would have $887,500 in the bank right now.
That’s what a big bet is. You are putting up money that you are willing to lose, and a high enough amount of money that the payoff for your investment will be life changing. There are many options for these big bets, and the two variables that typically change are the risk and expected return. Some examples of big bets are starting your own business, investing in penny stocks and investing in the crypto space. We have outlined some options on how to accelerate making money if you are interested in learning more.
Amount for each category
Lastly, I want you to choose an amount for each category. I personally do 60% financial security, 30% fun and 10% big bets. Based on risk tolerance and financial situation, it will be different for everyone.
You will want to put the money in each category in a different account, so they don’t get mixed together. Once you have picked your allocation for each category and set up the accounts, move onto step 5.
5. Automate your savings
Now that you are spending less than you make, you want to automate the savings process. An example of this is a 401k where the money is removed from the paycheck automatically and placed in an account removed from the account your general spending money goes in. Another example is M1 Finance, which I personally use. Money is automatically moved into an investing account and balanced between a set of ETFs that I have picked, without any manual intervention on my part.
Having the money automatically removed helps reduce temptation and makes it easier to live below your means. With automation, you don’t to waste a lot of time thinking about your investments. Your money is automatically put aside and growing for you and you can focus your time elsewhere.
6. Up your mental game
As you can see, saving is easy, it’s not hard. So why do so many people fail? Let’s talk about two mental issues that can derail people from savings greatness.
Limiting beliefs are ideas that you have about how the world works or yourself that reduce your potential. For example, maybe you don’t think of yourself as a saver, or perhaps you don’t think you could ever be a millionaire.
For this step, I would like you to take some time and think about what limiting beliefs you have. Ask yourself where do they come from, and question if they are really valid. Even if you do think they are valid, I would like you to test them. If you think that you are not a good saver, try this challenge step by step and see where you land. You might surprise yourself.
In my life, I went through multiple cycles of booms and busts. I would be broke and resolve to save. Before you knew it, I was living well below my means and saving a ton of money. This was the up cycle. After a while, my debts would get paid off, and I would become complacent. I would stop checking up on my budget and stop paying attention to what I was spending money on. Before very long, I was going back in debt and a down cycle would begin.
When I was younger, the up cycle was triggered by being $10,000, or more, in debt and the down cycle was triggered when I was no longer in debt. Later in life, the down cycle was triggered when I had $20,000 in the bank account and the up cycle started when I had less than $2,000 in my bank account.
Even though the numbers changed, my behavior did not and as a result I was not able to break through to a higher net worth, until I recognized my own self-destructive behavior. Take some time to think about how you behave financially when you have a lot of money vs when money is scarce. How are these behaviors different? Which of these behaviors are harmful and which ones are helpful? Which of these behaviors comes and goes depending on where you are at?
Congratulations, you made it to the end of the challenge! I hope you had fun, and I hope it has started some positive habits in your life. Feel free to reach out to me if you have any questions or run into any problems, and I wish you the best on your savings journey!