we’re super excited to share with you guys that we’re featuring an interview next week with robert and robin charlton, authors of our favorite book on early retirement, how to retire early: your guide to getting rich slowly and retiring on less. we can’t wait for you to read it!
we think it’s easy to feel a bit hopeless in the face of financial hurdles if you’re not a person for whom financial virtues comes easily. if you’re not naturally frugal. if you’re not a natural saver. heck, if you just sometimes want to blow a little money at the craps table in vegas, or pick up your friends’ bar tab. if any of those things have ever described you (all of them have described us at one time or another), you’re not doomed to a life of financial misery. but, you have to know what your weaknesses are, and develop a system to work around them.
at this time of year — new year’s resolution season — people are talking a lot about one particular buzzword that can feel like a punch in the gut to those naturally inclined to spend: willpower. willpower to eat less, to lose weight. willpower to go to the gym, to get in shape. willpower to stop watching dance moms, even though those kids are such amazing dancers. (um, i’m just speaking theoretically here. i’ve never actually seen that show.) let’s not debate whether framing those resolutions in terms of willpower is the right way to think about them. but let’s do agree that people often think about spending and saving in willpower terms.
researchers are still debating whether willpower is depleted over the course of a day (the “ego depletion theory”), but it’s safe to say that willpower is a complicated thing. sometimes we’re good at it, other times… not so good. and for the rebellious among us, the idea of maintaining willpower not to do something (like eating all the fries or buying everything at rei) can easily turn into a contrarian call to arms to do exactly that thing we’re not supposed to do. (again, theoretical. we’ve never rebelled from anything ever.)
our solution? take willpower out of finance.
any time we have to make a choice between something fun (shiny new object!) and something boring (money socked away for a rainy day! womp womp), there’s going to be that temptation to spend. turning down the fun thing in favor of the boring thing requires willpower, and we’re not always good at mustering that up. we make a million hard choices at work, for our clients, and just as adults generally, and sometimes the last thing we want to make is another choice. and it’s almost always more instantly gratifying to go with the easy, fun choice. it’s why we sometimes eat tater tots for our entire dinner instead of making the kale salad we know we should eat (and it’s why those tater tots get into our shopping cart in the first place). so whether willpower gets depleted or not, we don’t see any reason to “spend” it on financial decisions, when we can save it for the necessary ones, like getting our butts down to the kitchen to chop some kale.
this is why virtually our entire financial strategy is to remove as many decision-making moments as possible. a lot of folks are talking right now, during resolution season, about forming good habits and making better decisions, and that stuff is awesome if you’re a willpower overachiever. but if you’re a willpower slacker like us, few of those changes are likely to stick. rather than spin our wheels trying to equip ourselves to make a good choice each time we’re faced with a financial decision, and then failing, we’ve created a system in which we get to abdicate that choice altogether. (almost) no decisions needed. here’s how:
the centerpiece of the no-decision strategy is automation, based on the principle of paying ourselves first. (we wrote a long and detailed post on paying ourselves first that we recommend checking out.) we think of this as our “hide money from ourselves” strategy, but you can call it something more responsible sounding, like “systematic wealth accumulation,” if you prefer. (we aren’t really into the word “wealth,” but that’s just us.) basically, we set up systems to intercept money as it comes in, before we get a chance to get our hot little hands on it, and make sure that money gets saved for a rainy day instead of spent on new skis.
we started small. once upon a time, i filled out a form with my hr department to have $250 from each paycheck deposited into savings, with the rest going into checking. i did that in january of whatever year that was, right after i’d gotten a small raise, and it basically kept the paycheck amount that i got in my checking account the same size as it had been, while invisibly saving $6000 a year.
gradually, as our incomes have increased, we started squirreling away more and more this way, hiding every raise from ourselves either through deposits to savings or through automatic, monthly investments into our investment accounts that are timed to coincide with our paychecks. we now deposit almost half of our monthly income this way, and keep our checking account balance artificially low in the process. which means: we have a lot less available to spend than we actually earn. but we never feel like we have it to spend since we never see it in our checking account.
there is a caveat in all of this, of course: you have to be at the point in your financial life when you aren’t resorting to credit card debt to solve your itch to spend. but if you are willing to constrain your spending according to what’s in your checking account, this works brilliantly. if not, you could adapt it by using the cash envelope system, but that’s a whole other discussion.
we know that the money in our checking account has to cover certain things: the mortgage payments on our home and rental property, our groceries, several insurance policies, gas and utilities, a few other bills, and the occasional travel charge. but since we don’t leave much more in our checking account than we need to cover those things, whenever a spending temptation arises, there is no choice to be made. there simply isn’t money to spend. of course, we’re not idiots. we know there really is money we could spend, but that money is not easily accessible, requiring a multi-day waiting period to get it out of our emergency cash reserves with ally bank, or selling shares of some investment, and incurring capital gains, which means we’ll get a tax form in the mail, too. suddenly, that spending decision that seemed like instant gratification before seems like a huge pain in the butt, and not worth the hassle. so it really isn’t a choice at all.
a work in progress
like absolutely everything about our finances, it’s been an evolution to get to this point. we didn’t start out as pro-level money hiders. we started out trying to build our willpower and doing what the experts said to do to constrain our spending. but until we truly made unnecessary spending the hassle, and not spending the easy choice, we didn’t start hitting the high savings percentage that we’re at now. if you’ve tried the willpower approach and find that it doesn’t play to your strengths, consider trying some of what we’ve found to work for us through trial and error:
- split your paycheck so part of it goes automatically into a savings account. (any not-tiny business with professional payroll can do this.)
- put your emergency savings in a different bank from your primary one, so it’s a hassle to get at it.
- “hide” a certain amount from yourself each month through automated savings transfers or auto-investments, and if you’re comfortable living on the remainder for a few months, consider raising the amount. repeat until you feel just the slightest bit constrained. that will help you figure out what’s non-essential in your spending, and after you cut that out, repeat the process of increasing your auto-investments again until you aren’t giving yourself a lot of room for wasteful spending, but also aren’t scraping by.
- increase the amount you hide from yourself anytime you get a raise, preferably to consume the entire amount of any new income.
- tell yourself that bonuses are for saving, not spending. (okay, this one does take just a little willpower in terms of changing your mindset, but if you can get into the mindset that you don’t spend bonuses or any other extra cash you might come into, then it’s another non-decision to sock that money away without thinking about it. that’s why you’re not seeing pictures of our fabulous trip to the seychelles, funded by our bonus. because that didn’t happen.)
now we’d love to hear from you guys — have you found any strategies for working around any tendencies in yourself that are not so helpful to your finances? any other great ways you’ve found to avoid spending willpower on money decisions? tips for hiding money from yourself? spill away!
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Categories: we've learned