Actually Saving Money

by Dan Walsh

The Difference Between Getting Ahead and Not Falling Behind.

I cashed out all my frequent flier miles a few months ago to buy a $700 ticket home to Wisconsin. It was an unexpectedly expensive ticket, and I was proud of myself for having enough points to get it essentially for free (taxes and fees apply). I saved $700 and felt good about myself for doing so.

But something about that $700 nagged at me during the trip. Where did that money go? In my heart I felt like I saved it, but in my head I couldn’t account for the extra $700. It didn’t end up in my savings account, or my investment account. My pockets weren’t lined with crisp new $100 bills! So what gives?

Looking back on my personal finances I realize that I’ve been in this situation many times before. I felt like I “saved” money but it didn’t accumulate anywhere. I’d skrimp and save all month and dial on my personal-net-worth-o-meter didn’t even budge.

The problem is I didn’t actually save anything. I just didn’t spend that money.

I realize now there’s a huge difference between saving and not spending.

Language Is Powerful And Misleading

It happens all the time. Someone buys something expensive like a nice pair of boots and they call it an “investment”. It helps justify the cost. Sure, the boots will probably last longer and look nicer, but it’s only an investment if the boots create more value than the initial price. That’s what an investment is. Boots don’t typically go up in price as they get worn out, so boots are actually a “purchase”. Plain and simple. Calling them an investment is bit of verbal jiu-jitsu that only helps decrease the guilt.

I’ve been aware of this “investment” trap for as long as I’ve had money to spend and I take care to avoid it. But while I was sidestepping this financial pit, I was unknowingly getting caught up in the “I’m saving money” net. I was doing the same thing with the word “saving” that many people do with the word “investment”. No, I wasn’t buying boots, but I was fooling myself into thinking that I was getting ahead somehow. I was using “saving” for two very different situations and feeling good about the lie I told myself.

There Are Two Ways To “Save” Money

1. Save money by not spending. Limit or reduce spending to make ends meet or otherwise afford a product, service, or lifestyle that couldn’t be obtained at full price. This is how you make ends meet and stretch a pay check to the end of the month, but it is NOT actually “saving”. This is survival-mode.

2. Save money by retaining and accumulating over time. Incrementally retain amounts of money with the intent to accumulate a large sum. This is actually saving. This is getting-ahead mode.

I was using the word “save” interchangeably between these very different scenarios. The first definition actually defines the outflow of my money, will the second definition speaks to my inflow or retention of money. There’s a ridiculously large difference between the two situations to be using the same word.

So, let’s use the correct words from here on out.

Saving or Not Spending?

Everyone has to not-spend in order to live within their means. Even Bill Gates and Kanye can’t buy everything they see. It sounds odd, but they have to budget just like everyone else.

When I was in college I had to not-spend a lot in order to make rent and still afford groceries. In fact, I had to not-spend so much that I didn’t have any money left over to actually save. If I had saved, I wouldn’t have eaten. This trend continued even after college.

I was paid very little when I first entered the work force. In fact, despite my full-time employment I probably had less money overall. My life was no longer subsidized through student financial assistance, and I incurred more expenses like commuting to work. Again, I had to not-spend a lot so that I could make ends meet. Maaaybe I had $20 at the end of the month to actually save, but at that point it was worth more to me to go out for a beer with friends. You’re only young once, right?

During these early adult years I was operating in survival-mode. 99% of what I earned went directly to my living expenses. I had to make ends meet by not spending, so I conserved financial resources wherever I could. That conserved money simply floated around in my checking account until I needed it for other survival reasons. This system worked because all of that money went toward necessary expenses.

I don’t operate in survival-mode anymore though, so this system no longer works. I operate in getting-ahead-mode now. I make enough money to pay my living expenses, contribute toward my retirement, donate to charity, save for a down payment on a home, and (gasp!) go on vacation every now and then. In short, I’m responsible with my money, but I also have disposable income and sometimes spend it on fun stuff.

Scarcity & Abundance

At some point I transitioned from scarcity to abundance, but my mindset around the word “saving” didn’t change along with it. When I was in scarcity mode, all the money I didn’t spend – what I used to call “saving” – would eventually go toward necessities. Now, in abundance mode, all the money I don’t spend sits in my checking account until I spend it in a disposable way. It’s not really being saved, in the accumulate wealth sense of the word. It’s just hanging around until I blow it something.

I guess the bottom line is that not-spending money used to help me. It used to get me to the end of the month with rent paid and food in my mouth. Now not-spending doesn’t really help anymore. With the caveat that I’m spending within my means, not-spending doesn’t help me get ahead like it used to. A sale or discount on one item just encourages me to consume more somewhere else with the leftover money.

What’s the Point of Saving?

Saving money has three common purposes.

  1. Save up for an expensive item like a car or vacation.
  2. Save money as a cushion for something unexpected like a medical emergency, car repairs, or losing one’s job.
  3. Save up for retirement.

Ideally, you refrain from spending on many small purchases now, so that in the future you have a large amount of money for something that was otherwise unattainable.

That’s the whole idea behind the advice not to buy $3 lattes everyday so that you’ll be a millionaire when you retire at 70. Sacrifice the expensive caffeine hit now, and you’ll live in a beach front mansion with servants and a ferrari later.

I don’t personally buy into this specific example, but it illustrates the point. The strategy is sound: leverage a little discomfort in the present to create great value in the future.

The point is to SAVE money and have it actually GO somewhere better. All those $3 lattes need to accumulate somewhere. Why go through all that effort if it doesn’t pay off in the long run?

A Better Strategy

If I buy a Prius instead of a Honda Civic because “in the long run I’ll save enough money on gas to make up the price difference,” I’m setting myself up for a trap. Unless all that not-spent gas money ends up in a savings account then I’ve actually put myself in a worse financial situation. I have a higher monthly car payment and an extra $40 a month floating around in my checking account which I’ll probably spend on bullshit.

I’m not leveraging that gas money, so I need a better strategy. Here’s my proposal:

1. Only use the word “saving” to refer to currency that is transferred to some form of holding account for future use. This can even be a piggy bank, as long as the money is taken out of personal circulation.

2. Adopt usage of the term “not-spending” in my mental and verbal vocabulary to differentiate from “saving”. This will prevent inaccurate and misleading use of the word “saving,” and force me to think more critically about the outflow of my money.

3. Transfer money that was budgeted for, but otherwise “not-spent” into an actual savings account.

I’ll start right now. Gap had a 2-for-1 sale on t-shirts yesterday. Because of this sale, I didn’t spend $32. I just transferred that money into my savings account.