3 Simple Tips On How To Save Money

How Do I Stop Wasting Money? originally appeared on Quora: The best answer to any question.

Answer by Jim Maginnis, Engineer, on Quora.

Making a million is easier than saving a million. I remember the day I called my mom and told her that was specifically the day I had earned my first million. Most everyone does it ($25,000 for 40 years is a million dollars) - many do it more than once. But, few ever save a million. It's not that hard, however. About 80% of America's millionaires are first generation wealthy. Moreover, more than half of those have never received even $1 in inheritance. Here are a few guiding points that can help you (adapted from Drs. Stanley and Danko's Millionaire Next Door, 1998):

1) Spend less than you make - in fact, always save 20%

It is well documented that money in America has a strong preference for certain ethnicities. For example, about one in five Scotch Americans become millionaires likely as they are the least free with their money. A K-12 teacher saving 20% and investing wisely could have over $2 million in savings when retiring. It is always better to learn to spend less than to learn to make more -- without this, earning more won't help. Bankrupt movie stars, athletes, and business executives have all become but a sad cliché. Most people get this completely backwards. One common way Americans fail is to buy too big of a home (for example, Warren Buffett still lives in the first home he ever bought). In a 1996 study, Stanley reported the typical millionaire paid less than $400 for his most expensive suit (dressing for success seems a myth) and less than $25,000 for his or her most recent car... just $3,000 more than the average American spent. Let's be honest, most of us could be more frugal.

2) Give less than you make - abandon uneven relationships

About one in five Russian and Hungarian Americans become millionaires perhaps due (besides their strong entrepreneurial spirit) to not being overly free with their affections. Another common way Americans fail is by throwing good money at bad family members (about a third of those ages 25-30 today still live at home) or friends. Many Americans are excessive givers, whether due to some prosperity doctrine or just not being able to say "no". Many of us work at jobs where we're clearly underappreciated. Moreover, 60% to 80% of divorces are initiated by women (and an amazing 90% for college graduates - or ten times the rate for college educated men) likely due to there being so much money in it (with roughly 90% of child support dollars going to women). Choose carefully or skip having a family altogether (a glum reality for guys in America these days as per Dr. Helen Smith's Men on Strike: Why Men Are Boycotting Marriage, Fatherhood, and the American Dream - and Why It Matters, 2013).

3) Your best investment is yourself

Education truly is a "silver bullet" for all that ails you. A college degree is called the Million Dollar Gift as it typically provides one more than a million dollars ($1.2 million on average) in additional lifetime income (of course, it should preferably be a degree in something that's currently marketable). Hey, did you know many top "for-profit" schools (Harvard, Yale, Stanford, MIT, etc.) provide free tuition for those from families making less than $60-$75,000? Did you know a minority of students are accepted into college just on grades (good thing for me)? And, did you know there's about $16 billion in aid and that most of it is not merit based? Finally, it is said the "rich" usually plan for three generations while the "poor" only plan for the weekend. Good advice from Rich Dad Poor Dad is to build a financial plan (with a professional planner) and then immediately do it again. A financial plan should not be about getting rich but to primarily just help identify what's important to you. Plus, it's difficult to improve what you don't track.

Assuming the rich teach these three lessons to their children, which are only financially successful in about one in five, that would mean that becoming a millionaire only requires these lessons and is not dependent on special privileges or advantages. Did you know immigrants are three to four times more likely to become millionaires than native-born Americans? How about that immigrants comprise 41% of the student population of Ivy League schools, yet only comprise 11% of the population in the U.S? Moreover, 55% of PhDs awarded in American colleges go to foreign born (Dr. Wulf, President, National Academy of Engineering, 2005) and 60% of the top science students and 65% of the top math students in the U.S. are children of immigrants (Wikipedia). If the average immigrant has fewer connections, less education, less understanding of our culture, and may not even speak the language, but can take the opportunities provided in this country and go from nothing to millions at four times the rate of a native citizen, what is their advantage? Might this be due to the fact that immigrants are twice as likely to be Catholic? The simple lesson to learn from this is likely that finding or working to build a supportive community can't hurt. Moreover, success starts with a firm ethical foundation. Marva Collins always had her second grade class (who were often working at a sixth to seventh grade level by the end of the year) start the first day by reading Emerson, Shakespeare, and Plato. Accelerated living comes more easily after finding our moral principles.

It seems like there are as many definitions of financial planning as there are advisers. A complete financial plan starts with a full listing of your goals and values, identifies your priorities, reviews your current expenditures, reviews alternatives, develops appropriate strategies and solutions, takes the needed actions, and maintains a constant review of everything. But, that is beyond the scope here. Before Warren Buffett was a great earner, he learned to be an Olympic class saver, saving the equivalent of $70,000 in today's money while paying the tuition and expenses of college. So, let's talk about the most basic aspect of a financial plan... how to start a home budget.

Most people have a single checking account for all of their Bills and Spending. This could be called "traditional BS money management" (ha ha). In a traditional BS plan, if you don't spend all of your cash, the "extra" money typically gets saved into a simple savings account. This can cause a few problems:

1) Does not formally plan for periodic expenses or an emergency reserve

2) Balancing "out money" and "in money" can drive you to spend everything you make

3) You feel constantly unsure about where your money's going

4) Your priorities end up backwards -> Spend first, Save second

When you normally think of saving, you focus on not spending money on what you want. You think of yourself on a financial diet where you're only working to deny yourself things. This is never fun. So, let's try something different.

First, I would start by suggesting you open two checking accounts and two savings accounts. This didn't use to be possible in the U.S. (with a single SSN) but now most every bank allows it. I would have your paychecks deposited into your first savings account. Then, automatic transfers can put set amounts into your second savings account, which we will call your Opportunity Account, and your two checking accounts. One checking account is for periodic expenses such as your mortgage, debt payments, etc. (which are typically paid automatically). This is your Bill Account. The other checking account is for discretionary expenses (ones you can vary) such as gas, food, and entertainment. This is your Fun Account. Your goal each month is to spend every dollar in your Fun Account. You can freely do this knowing your bills and savings are taken care of. If an unexpected expenditure occurs, take the money from your Opportunity Account. You'll just unbalance your budget if you take it from anywhere else.

The problem with traditional debt management within the traditional BS money management is that unexpected expenses make it harder to ever dig yourself out from under your bills. It likely feels like you can never get ahead... because you don't. Therefore, you must save even if at the expense of not paying down your debt faster. If you have debt, you should create a budget that sets aside a monthly amount for that debt AFTER saving. Then, that savings can become your most valuable resource to avoid falling back into debt. If you still can't seem to stay within your budget, setup your Fun Account in cash. Studies show people have less resistance to using credit cards and checks as to spending cash. Finally, write down everything you buy (at the very least just to spend more time and thought on each and every purchase) and then review your current expenses for surprises as well as areas you know you can cut back.

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