A long time ago, far, far, away…. I began this blog by The Richest Man in Babylon.” This book contains many simple, yet valuable nuggets of financial wisdom, such as the need to squirrel away at least 10% of one’s net worth. At this stage in my life, I actually feel this is far too little. My personal goal is to save closer to 40-50% of my income after taxes.
Are humans even wired to save? Why do so many of us have trouble with savings in the face of immediate gratification? Are we simply irrational?
I think that people are for the most part rational when it comes to achieving their goals, but we don’t necessarily have the right systems in place. Savings comes naturally to us in a sense, as we realize we need to have at least somewhat of a buffer for lean days ahead. We did not, however, evolve in a time when we could expect to live long lifespans, or in a world where significant capital accumulation was possible. Even if one “saved” by drying meat, building a few tools, and storing some nuts and seeds, there was a practical limit to how much one could save in times past. This has carried forward to today, where we can easily see the need to save for short-term goals, but have difficulty thinking beyond that to the more abstract long-term.
I admit that this is something I have had personal trouble with. The short-term goals of needing transportation, going out, etc… always outweighed any longer-term considerations. As time has passed and I have grown a bit older, I have realized that those of us living today are likely to be living much longer lives than those of generations past. If we want to maximize our lives, and ultimately our happiness over our entire lives, then we need to start thinking about what we can do to plan for those years ahead so that we can enjoy them when we get there!
Embracing a philosophy of savings doesn’t mean we need to be miserly. We can be frugal and have fun at the same time.
Here are the three main reasons why I squirrel away my money:
- For the future. Savings are ultimately a form of deferred consumption. I know that by sacrificing a little bit now, I can ultimately enjoy life that much more down the road. My savings become an investment that someone else can use to grow their business, and ultimately this makes us all better off.
- For the present. By saving more, I also learn to live on less income in the present. This is actually a form of security. Should there be shocks to our income, there is a lot of slack to adjust, but at the same time, while times are good, I am building up a buffer that will help lead to financial independence down the road.
- For the unknown. Without savings, I am at the mercy of my employer and of the economy. I would be stressed out all of the time and not know where my next meal would come from. This sort of uncertainty isn’t very pleasant.
I am only starting out on my journey toward financial independence, but the further I go and the more I learn from my fellow bloggers and Yakeziers, the more I realize that the dream is actually possible and I only need to reach out as far as I can to get there. Those with the highest net worth can sometimes be the biggest squirrelers around. If you are interested in reading more about squirreling away your net worth and living well, I recommend you visit my fellow blogger Squirrelers, where he shares wise advice as well as stories of squirreling gone wild.
So, reader, what are your primary motivations for squirreling away your money, or eating the nuts that you have saved if you have reached that point in your life? We all have our own personal dreams and goals; what are yours?
I love that Squirrel picture. He is adorable. (I guess it could be a she too…)
I save because being without money scares me to death. We didn’t have a whole lot growing up, and I never want to go back to living like that. I don’t want to worry about money, I don’t want to fight about money. I just want to live a simple, peaceful life free of worrying about how we will pay our bills.
That’s a very good reason IMO. Money caused a lot of problems when I was younger, and I definitely don’t want to go back to days like that.
Money was always tight growing up for me as well. I was also always taught that being in debt is wrong. I strive to be a good steward because I do not want the burden or rather the shackles of debt encumbering me. Stewardship is a Biblical principle. Striking a balance with saving, giving, and spending is key to becoming financially independent.
My reasons for saving are a lot like yours. I think I focus the most on #1 through the balances in my savings account but will likely derive the most benefit from #2 through living on less long term. The savings is like giving yourself a fish, learning to live on very little is definitely teaching yourself to fish. Putting them together makes you really well off.
That’s a good way of looking at it! Money can be used to express all of our values and can really be used in a good way, or it can hurt us if we misuse it…
Your 3 reasons to save are really broad and they cover almost everything. 🙂
I feel like we are mostly saving for the future. It’s also nice to know we have our expense under control and are prepare for emergencies.
Do you think that retirement by 40 is still aggressive? I guess it depends on what you consider retirement and what your overall goals are. I’m definitely up for “out of the rat race” by 40 but I will probably never retire in a sense.
I am trying to get to the point of financial independence so that I can have options regarding what to do with my time. Right now, I am trading my time for money to purchase food, clothing, etc. Someday, I would like to have my money make money so that my time belongs to me.
I love the Richest Man in Babylon book. I have read it several times.
It really is ultimately about time in the end. Even the richest people have as much or as little time as the rest of us; the difference is they can focus it on their highest aspirations.
Savings means choices! For me retirement savings means I can take a trip, replace the car or remodel the house. I made savings a priority so I can have choices. The great thing about choices is you do not have to do it. The comfort is knowing I “can” do it!
Yep, knowing that you have the option but you aren’t forced to go down one path. That’s the way I see financial independence — being free, but not obligated, to work, while still having a decent standard of living at home. Getting to that point doesn’t come for free, but it’s worth it to get there.
krantcents said it for me – “choices”. Also, I very much like the idea that I’m earning money from my savings at all times. To me, learning to get money to work for you rather than against you is a huge financial maturity step.
I think to get there you need to rebalance your scale between instant gratification and delayed gratification. If people see how much they can benefit from the delayed gratification then they are more likely to go for it.
Kevin –
The title of this article naturally caught my attention 🙂 Later, toward the end, it was cool to see your mention of my blog, thanks!
So, why do I personally squirrel away money? I think that the core reason, deep down, is a fear of not having any when older. I don’t want to be in tough position later in life. Frankly, I wish I operated with a different perspective, and my interest was more opportunistic. The reality is that deep down I prioritize security more and consider it more of a base level need.
Just read your latest post on home ownership and there’s one good point in there — even when we think we own our home, we are still renting it from the government in a sense. We have to pay those property taxes, after all.
P.S. It was the perfect opportunity to highlight your blog! 🙂 I personally fear that I will be a wage slave my whole life. I mean, I do appreciate the opportunities that I have, but I still want more. I would enjoy working more if I didn’t have that feeling of need in the back of my mind.
If I had money to squirrel away, I’d do it for the same reasons listed above. I’m trying to expand my income so I can reach that point. I also want to save it for buying a house.
Buying the house is a big one — that’s what post graduation was about for me 😉
As far as the savings go – I do not believe in 7% annual interest, low inflation or social security. I believe that putting away 30-40 of your disposable income will barely keep you afloat during retirement.
I love what I do but there is no guarantee that the job will last. Honestly. Life is a collection of experiences.
The best way to save – have two-three jobs, do not go out or on vacation. Do not have anything on your mind but job and savings.
Sure you can retire at 40+. Even better – you won’t need much, as during your life you did not do much.
I am not advocating it, as a life style. But when I analysed our family expenditure over three years. I just got some information and we decided to freeze them. Not cut, just try to control ourselves.
Otherwise what is the point? A penny for your thought.
I would definitely love to be out of the rat race by 40, but I won’t be retired. I’ll still have need for income even then, and will want to keep growing capital going forward.
P.S. I agree, with economies regressing in per-capita terms, governments making a mockery of the monetary system and giving the bankers freedom to run around and knock everything over while being protected from the losses they would face on a free market, there will be a real need for savings if nothing else than to stay afloat in this rushing tide.
I do believe that the SS promises will be kept in some form, but I definitely won’t count on it for my own older age. If it’s there then great, but I don’t want to rely on that. I just see those payments as yet another tax.
I save for a few reasons:
1) I’m self-employed, so I won’t get a pension. My retirement is up to me.
2) I want to hire a nanny when I eventually have kids. That’s gonna need some savings.
3) I like to travel. I save to travel in the short-term (within 1 year) AND to do bigger trips in the medium-term (within 3 years).
4) My car is old. Eventually it will break. When that happens, I want to buy another car in cash. I have never, ever had a car loan and I don’t intend to start.
These are all great reasons for saving. I also don’t have a pension, and you know what? I’m glad in a way. Most pensions are exaggeration promises that I wouldn’t place much faith in being around when I need it. At least with self-directed investments, I’m responsible for my own fate and can clearly see what I need to make up.
I agree with you Kevin. 10% really isn’t that much. It’s a great start if you are used to saving nothing, but for many of us personal finance guys, we’d rather shoot for 30-40%.
Some of my savings goes toward updating my website, some goes toward my 401(k), and soon, much of it will go toward paying off our new house! Life is good, especially when there’s money to spare. 🙂
10% barely keeps up with inflation these days! 😉 Your goals are laudable as well.
I’m with those who site “choice”. Each year, I can assess my situation and ask, “Do I want to work this year?” If the answer is “yes”, then I can go to work and enjoy it (because that’s what I want to do).
But for the upcoming school year (2011/2012) I’ve decided to say “No”.
Squirreling money away over the past 21 years has allowed me that luxury. I’ll go back to work as a teacher, perhaps the following year, but I love the option to choose when I want to work, and choose when not to.
Hey Andrew,
It’s definitely really great to be able to have that option! That is one of my primary motivators as well.
Great post Kevin.
I love The Richest Man in Babylon. I first read it when I was 19 years old and I have read it many times since. I also give away a lot of copies, mostly to high school graduates.
I am currently saving 20% of my net, but I plan to hit 30% in the near future. My goal is financial freedom, like many of my fellow bloggers. I dream of working from house and making my own paycheck. So, I am squirreling away as much money as possible to make that happen. I am also paying extra on my mortgage in order to pay that off early. I would like to semi-retire in my mid-50s.
Financial freedom is definitely the dream. In today’s day and age with so much material prosperity it’s really a joke that living standards have stagnated in real terms in the past couple of decades. It would be easier if that productivity hadn’t been siphoned off into bubbles and bankers, but I digress! We’re seeing changes coming up ahead and though it may get worse in the short run, in the long run this is just another lesson for us to learn and get past on the way to a brighter future.
I also think people can be motivated to put money away because they’re inherently lazy. I’m pointing the finger at me right now, and I can’t be alone on that one…at least I hope not!
Well sometimes I’m lazy to spend, so automatic savings and transfers are good 🙂
Hi Kevin, I liked that book. I am partial to short and sweet lessons! I was raised to save and feel fortunate because it is easier for me to save than splurge.
I wonder how much of it can be nature versus nurture! I think in my case it’s simply due to life experience as I see how beneficial savings can be, and what you can do after many years of storing up acorns…
It is so true that it is harder to save for the abstract future. I have a three year budget in place but after that I don’t know what to budget for. I’d also like to save more than 10%. Mostly because I know I can live on less but if I see more in my bank account, I’m likely to spend it.
I don’t budget too much but I keep the ultimate goal in my mind, which comes later down the road. That’s what pushes me to keep up the high savings rate because I know it will pay off, even if I don’t see more specific items at this time.
This made me think of a video of a study I saw a while back (can’t remember where). They tried to teach chimps to use tokens in exchange for food and the chimps could earn tokens for various things. At the end of the week they would hold a market with various stalls and sell food to the chimps at different prices…. Of course each week the chimps would spend every single token and stock up on stuff for themselves.
I think we have that in us and saving came when society as we kind of know it today started to form but I don’t think it comes normal to us, that’s why we have to work so hard at it and that’s also part of the reason why the financial crisis hits over and over throughout history.
I’ve also read that long-term planning and capital accumulation only really started when humans became intelligent. We have a lot of animal instincts in us, some good and some detrimental to modern-day living, and we need to manage it!
without getting into all the valid nitty and gritty, it just feels right to do so!
Simply said and true 🙂
I save because I have figured out having the ability not to work decreases my stress level and makes me happier. As it stands we could only cover 15% of our expenses but over time I plan to be able to cover much, much more. It only took me 7 years to cover 15% so it should take me less than 40 years for me to reach my goal and in 40 years I will be 66.
You’re still very young so you have a great amount of time ahead of you! I only started to save in the later half of the 20s…
I’m motivated to save by the many tales of financial foolishness I’ve heard, and continue to hear.
Agreed 101, this is a big motivator for me as well. I have a story coming up soon…