The Wrong Way to Save Money
by Dana George | Nov. 25, 2019
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It can be tough to save money, but as long as you're doing it, why not do it right?
With the political season upon us, it's nearly impossible to avoid sound bites about the economy. One person says it's never been better, while another points to stagnant wages. One person says that personal savings are up, while another points out that average and low-income earners are putting very little money away. It's enough to give us mental whiplash.
But let's put the political spin aside and turn to research. When the research company Financial Health Network conducted a study of how Americans are faring, it found that only 29% of us can be considered financially healthy. In fact, nearly 40% of Americans admit that they would struggle to cover an unexpected $400 expense, according to a report from the Federal Reserve.
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And here's where that mental whiplash comes in. As important as it is to save, there is a wrong way to put money away. As counterintuitive as it may sound, blindly saving money without a plan can be counterproductive.
1. Loving your savings account (a little too much)
There is value in keeping money in a savings account -- liquid funds that you can easily access. That said, putting all your financial eggs in this particular basket is an expensive mistake. The best rates for savings accounts today hover around 2%. When you consider that the S&P has averaged a total return of 9.8% over the past 90 years, you might earn more in the long run by actively investing that money instead.
2. Postponing preventative maintenance
It's easy to put off doing preventative maintenance on your home or vehicle at the best of times. And it's even easier when that procrastination also saves you money. However, skipping a $250 to $300 car tuneup in favor of tucking money away can cost much more in the long run. Not only does gas mileage suffer, but ignoring manufacturer recommended tuneups can put unnecessary stress on your ignition system or damage your catalytic converter.
The same goes for small maintenance issues like changing the furnace filter in your home, having small roof repairs made after a storm, cleaning the chimney, and maintaining the outdoor irrigation system. Small, unattended issues can turn into costly problems later.
3. Falling for sales
One thing most savers have in common is that they shop carefully and know how to find a bargain. They make lists before heading out for groceries, and keep their eyes open for the best deals on products they need.
However, bargain hunting can sometimes lead you to overspend. Stores put items on sale to inspire impulse buys with deals that seem too good to ignore. But why buy a wrench because it's marked down if you don't need another wrench? Being a savvy saver also means being a savvy buyer.
4. Holding on to high-interest debt
If you're paying the bare minimum on your debts in order to save, a bit of simple math will show you why it can be a bad idea. Compare the interest you pay on your debt with the interest you earn on your savings (or hopefully, your investments).
Let's say you have the bulk of your money in a savings account, drawing 2% interest, but are paying 16% interest on a credit card. Every month you delay paying off the higher-interest credit card, you're losing money. For example, if you owe $3,000 on a credit card and make payments of $60 per month toward it, it will take you nearly seven years to pay off and will cost just shy of $2,000 in interest. If you left that same $3,000 in savings, it would earn around $450 in interest during that time. In this case, paying the credit card off puts an extra $1,550 in your pocket.
However, if you've invested your savings and are earning 10% in interest, paying off an auto loan with 5% interest doesn't make sense.
5. Not rewarding yourself
Deprivation gets old and slip-ups are discouraging. Like a weight-loss diet, a financial diet is about making long-term gains. You don't have to be perfect; just moving in the right direction.
Why not treat yourself to something special after meeting a specific goal? Say you enjoy golf or getting a pedicure with friends. Set a savings goal, then reward yourself with an enjoyable activity once you've achieved it.
A reward system can help you stick with your savings plan. Doing something kind for yourself makes you feel energized and content. Most importantly, it helps you maintain your healthy savings habit.
Deprivation is the other side of that coin. Deprivation makes you feel out of balance, and makes it easier for you to tell yourself that you deserve something new and expensive. It can make you feel frustrated and entitled to break your savings habit. Saving, like most things in life, is about balance and mindset.
If you are saving money right now, kudos to you -- no matter how you're doing it. You are doing something that others struggle with. But if you're going to save, why not save more by doing it in the smartest way possible?
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About the Author
Dana has been writing about personal finance for more than 20 years, specializing in loans, debt management, investments, and business.
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