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!
Don't miss a thing! Sign up for the eNewsletter.
Subscribe to get extra content 3 or 4 times a year, with tons of behind-the-scenes info that never appears on the blog.
Categories: we've learned
We also try to eliminate the need for regular feats of willpower by getting our money where we want it (and away from liquidity) as soon as possible. For us that’s meant upping our investment rate and, although we can’t automatically pre-pay our mortgage company, we do try to get the money “hidden” in equity soon after getting a paycheck.
That sounds like a perfect approach. We’re the same — wish we could set up auto pre-payments with our mortgage! But we have the world’s worst servicer, and they can’t even properly credit our additional principle payments without adding interest charges, so we’re doing the next best thing: paying it off and getting it out of their hands as soon as we can. ;-) Love that you guys, who seem like such frugal champs, also employ the hiding strategy!
I’ve always liked hiding raises by rolling them into a debt payment. But other than that I’m a straight-budget guy…that’s how I’m wired. I know that when I assign various jobs to all my money I’m really good at carrying out those plans.
That’s a great way to go, Ernie! Hey, if budgeting works for you, then great — that is a tried and true way to achieve financial success. :-)
We have a secondary saving account with automatic deposits set up. The account has no debit card attached to it, so the only way to get cash is to go to the bank. This make us think twice about spending money from this account.
That’s great! We’re all about the inaccessible money!
Bank your raises, bank your bonuses, and get in the 401k early in your career. Our MegaCorp also allows employees to automatically ratchet up 401k contributions each year. You can set contribution % triggers to automatically kick in at annual pay raise time.
Amen to that! My megacorp allows the same thing, and my favorite moment of the last year was when a mid-level colleague said to me, “Whoa, I’m saving 12% of my salary in my 401(k), and I didn’t even know it! Go me six years ago!” :-)
I have YNAB has changed our whole perception of how much money we think we have. By budgeting with different categories we just stop spending when the money is gone. After almost a year and half of this I’m still a little surprised when I log into my bank account to reconcile and see that we have thousands of dollars just chilling there lol
How awesome! I love that you found a system that works for you, and that has let you save up a bunch of cash. We’re not budgeters ourselves, per se, but keep hearing great things about YNAB!
Oh, I am so with you on setting the emergency fund away in a separate Ally account where it’s a) earning decent interest, and b) not easily accessible. I just set this up a few months ago, as a matter of fact. Also I’m really happy with Acorns. And Betterment automatic deposits.
Bonuses are for saving, not spending. Yes. Sigh. About a year and a half ago, before I started thinking about money in a conscious way, I won a $10,000 award. So, basically a check for $10,000, minus taxes, that I could use for pretty much whatever I wanted. And while I don’t want to beat myself up too much, I have to admit that I spent probably $1000 of it within the first few months on things I didn’t necessarily *need*. Yeah, I saved the rest, and I’m glad of that, but I wish I’d received the award several months later than I did, because then I would have saved ALL of it.
You know what might actually be kind of good? Kale-wrapped tater tots.
Oh my gosh — isn’t it sad that 1% counts as decent interest these days?! But yay for setting up your Ally account! And working with Acorns and Betterment. And geez, don’t beat yourself up over that $1000 you spent. In the scheme of things, that will not break your finances, and we’re also believers that it’s okay to spend some money sometimes. You don’t always want to feel restricted in your spending. It’s like if you’re always dieting, the tendency is to obsess over food and sometimes go off the deep end in a super self-destructive way. If your spending is too constrained all the time, it’s easy to develop negative thought patterns. So I say focus on the positive: that you didn’t spend ALL of that award, and you saved most of it — super awesome!
And haha — I don’t want to mess up my tater tot indulgence with healthy food! I’ll just have a bowl of kale on the side. ;-)
This is my current challenge. It’s very easy to become complacent with savings once you actually retire, particularily if you have a set monthly income to rely upon without depleting your existing investments. I frequently find my mind wandering into the “what does it really matter?” mode when it comes to adding to our existing investment accounts. While technically we no longer need to save for retirement, we certainly dont need or want to overspend, particularly on non-glamorous, routine expenditures like groceries and utilities. Gaining the discipline (willpower) to sock money away in retirement is proving quite a challenge. However, our mantra continues to be to save as much as we can on the mundane in order to splurge on our passions, and wasting hundreds of dollars per month on heating the house or buying K-cups is not what either of us had in mind! We’re still working the bugs out on a workable budget, and January marks the start of a new method I’m very optimistic will allow us to keep routine monthly expenses to a fixed amount, which should help us determine how much we can safely automate into savings. It’s time to stop procrastinating and get this done! Thank you for the motivation.
You’ve mentioned saving while retired a few times, and I’m curious about what you’re saving for. Is the saving you’re aiming to do now for short-term goals like vacation or home maintenance, or are you actually still trying to put money into long-term investment accounts to pay for retirement expenses many years from now? the stuff you’re talking about is territory we haven’t reached yet, so I’m curious! :-)
Short term large expenses (new roof, deck repairs, replacement of a vehicle); then potentially add to investments in the event of catastrophic illness or expensive long term care in home (preferably) for one or both of us. Ideally that scenario will never come to pass. Short term goals are my immediate concern. There’s really no reason we can’t put away a large percentage of our current income to offset large expenses without touching the principal investments, it’s just very difficult to discipline ourselves to do so when we’re well aware the funds are available!
Gotcha — that’s helpful to understand! Good luck reaching your savings goals this year!
We’ve done this half way. Our normal spending is pretty low but with pretty significant fluctuations, so part of it has to be manual.
To take out the willpower, I pre-plan our paychecks for the month. My first check covers rent and all fixed payments and the second check covers the credit card bill (to be paid next month). Hubs’ check and anything left over from my check goes toward saving. IRA investing is all automatic. It’s worked well so far. I also keep how everything was divided from previous months, so I can see where I’m slacking off.
I’m good about not touching money once its designated “saving” so all our stuff is with Capital One 360. If I ever start sticking my fingers in the saving jar, I’ll move it!
That sounds like a great system! If it’s working for you, then it’s perfect. I also should have said in the post, but we do have a “life happens” fund at USAA, where we bank, that we do have to dip into sometimes if we go over. That money is accessible, and sometimes, like my recent massive expense report whoops, it saves our bacon. But then we make it a priority to pay ourselves back as soon as we can!
>>> “like eating all the fries or buying everything at rei”
…have you been watching me lately??
The biggest way I take willpower out of the equation is by designing my life to minimize spending on two of the “big three” expenses, housing and transportation. For most people, these are effectively fixed expenses, at least in the short term. You make the most important choices very rarely: where will you live, and how far will you be from work and day-to-day services? Once they’re made, the spending (or savings, if you chose wisely) are automatic every month.
Haha — so we have the same weaknesses! :-) What you’re getting at is a whole other issue that’s super important: constraining your costs. Like you, we believe most people overspend on housing, and we’ve made a very conscious effort to buy way less house than we can “afford,” which is how we’re close to paying it off. And since we work from home, we have zero commute, which is great for spending. But often it’s tough to make a choice on both housing and transportation where both are the low-cost option — often, if you live close to work, you have a higher priced home than if you live farther and pay more for transportation! Are you one of those rare folks who managed to find the sweet spot of low costs on both ends?
Good point; there’s often an inverse correlation there. I work from home now (which is the best!), but previously I had chosen to overspend on housing to be able to walk to work every day. It probably was not the most frugal choice from a pure financial perspective, but the sanity gain from not having a commute was well worth it!
Amen, brother! We used to live in a horrible city for traffic, and it was BY FAR the worst thing about living there. The rest was pretty great, but that traffic just Sucks. Your. Soul. So glad you get to avoid it completely now!
Terrific post! Will-power is SO over-rated. We hide money from ourselves in plain sight. We have two knee-high coke/beer bottle piggy banks. All loose change and occasional $5s and $1s get thrown in. We cash them out every few years prior to a vacation and usually end up with around a thousand dollars.
Thanks! And what a cool story about your change banks! That’s a pretty massive payout you’re getting from those things. We really only use cash these days when absolutely necessary (otherwise we put things on the cards and get the points! — and of course pay them off immediately), so we don’t end up with much loose change anymore. :-)
Yup, automation is absolutely a huge help in this whole savings business. Like you, we have our savings accounts automatically filled up with cold hard cash every time we get a paycheck, and our “take home” pay is whatever is left over from that savings. Also like you, we have a separate savings account for our emergency fund, which will also be the account that we will use to fund the purchase of our truck and RV.
For my wife and I, we never really have the temptation to steal from our savings because we realize that all we’re doing is cheating ourselves. We ask ourselves if that purchase is worth potentially delaying our retirement, and the answer is always no.
How many more months am I willing to work in order to buy this item? When the answer is always ZERO, the willingness to save pretty much becomes automatic. :)
Glad the automated approach is working for you guys, too! You are definitely stronger than us if you never have the temptation to dip into savings. (It’s never for stuff for us, just for travel! We always want to do more of it!) But that’s a great way of looking at it: you’re cheating yourselves if you steal from savings. The way we try to think about it is: it costs about $100 a day to live in retirement. Is this thing that costs $XXX really worth trading X days of retirement for? Sometimes the answer is yes, but most of the time it’s no!
We’re closer to the beginning of that journey and ironically, we too started by taking just $250 out of each paycheck. Now we’re working to gradually up that amount incrementally and make adjustments accordingly. It DOES however take a great deal of willpower to make that change in the first place. :) But one-time willpower is something I excel at! :)
Haha – true! All of this does require little bursts of willpower to set it up, and to increase things after raises and such. But that’s easier for us than everyday willpower. :-) Hooray for starting with $250 and building from there!
I’m trying an interesting experiment this year where my paychecks get direct deposited to my primary savings account and then a fixed amount each month gets auto transferred to my checking account. I’ve never really thought in terms of “emergency savings” but instead in terms of having a cash buffer so I think this should work out okay. I’m mostly doing this to smooth out the months where my paychecks are low due to front loading retirement accounts.
If we’re still working in 2017, I think we’re going to try your approach, because that will give us a chance to test run our retirement finance approach — that’s definitely what we’re going to do after we retire! Transfer an allowance to checking each month, rather than giving ourselves access to our most likely quarterly withdrawals from our investment accounts all in one go. In your case, I think that approach is super smart, to even things out!
I love that this way means that I don’t care about where the money comes from that I’m spending that month and really helps to separate earnings from spending. It also means that the buffer can dip low and then get replenished at various times in the year, but not on a specific day. I suppose it’s probably a normal way of budgeting for people who have more irregular incomes, but this is fairly new to me!
It seems like a great system! I hope you’ll blog about how it goes over the longer term!
“Pro level money-hiders” – – YES. I love this, and aspire to get to that status level. Your systematic approach of hiding & automation has always jived with my style. I have so much to be thankful for in regards to your posts in terms of strengthening my money systems! Especially in terms of every bonus = savings and a raise = increase in savings contributions. It took me a year to get comfortable with all of this, but now I feel like willpower isn’t even in the equation because of the seamlessness! Quite honestly, I’m not sure how the savvy savers did it in the past prior to automation/online banking/online investments etc. (shoot, maybe that’s the millennial in me talking ah lol!).
P.S. Dance Moms reference, those kids are incredibly talented!!
Wow, thanks, Alyssa! That is the best thing you could say, that we’ve helped you even a little bit. :-) And I agree completely! I don’t know how people did it back when you got a paper paycheck and couldn’t do any online banking — LOL. Then you’d have needed real and actual willpower! Thank goodness we live at this moment in history, and not earlier. :-) And OMG — I have such a love/hate relationship with Dance Moms. I can’t stand the reality show part, but I suffer through it to see those kids. :-)
This is actually a good summary on what to do: automate, automate and automate. This way, things are done for you and there is less temptation.
We have automated most of the saving and have allocated some personal fun money to feed the occasional temptation and to keep the now worthwhile as well.
The biggest willpower we need now, is to avoid lifestyle inflation. As you mention, we also try to invest bonuses received, to save salary increases. Once you have the mind set, it becomes a natural habit. For us, it helps to set a goal. It helps even more to understand why we do it: to get the financial freedom to do what we want. This is a big motivator. That being said, we should not forget to life here and now (see the fun money above)
Agree with you completely on the fun money, and on enjoying the now, not just the future! That’s built into our “allowance” for ourselves — some funds for travel and for things like going to movies or skiing, etc. Just not a lot of extra room for things! :-)
Mmmmm… tator tots…. I seriously didn’t stop thinking of them since you mentioned them mid-way through the post… I know I have a bag in my freezer at home… It will be a test of my willpower tonight to see if I go with the scheduled healthy meal… or just do the tator tot meal…
Our finances have definitely been willpower based thus-far, and I’m thinking that I might take your advice and start making things automated. Time to do some investigating and learning!
Haha… sorry about that! Save the tots for Friday… they’re more delicious at week’s end. :-)
I say go for the automation! Honestly, they are the entire secret of our success. We aren’t naturally disciplined enough to save what we saved, but by not thinking about it at all, we’re kicking ass. :-)
Even if will power isn’t a limited resource (I happen to believe it’s not), it is a known element of humanity that our decision making power declines over the course of decisions made. A lot of removing willpower from your finances is about removing decision making from finances. This is why my husband and I budget each month, and its why we do all our giving and investing first thing after budgeting (or automatically) throughout the month.
We keep a large cash buffer, but that’s mainly because I have an irritational fear that my bank’s automation systems are as janky as the systems I build on my PC (to date, my systems fail much more than my bank).
Couldn’t agree more — it’s really about removing the decisions themselves, which is a precursor to the whole willpower moment. We’ve just seen a bunch of willpower posts this week, and wanted to speak in the vernacular of new year’s resolutions. :-) Your system sounds great, and I don’t blame you for having some healthy mistrust of the banks. We have to correct at least one mistake a month at one of our financial institutions (most often a mortgage servicer), so those guys aren’t infallible!
We still struggle with whether to increase automatic deductions towards the 401K or use that money towards paying off debt. For now, we are focusing all of our energy towards paying off debt. I am definitely planning to use automatic deductions once we get rid of those stupid credit cards – we will maintain our low living expenses, just reallocate the credit card payments to savings and investments.
Hi Harmony. We’ve been there! Debt is such a toxic thing that it has to be your top priority. I think you’re doing exactly the right thing (assuming you’re not giving up an employer 401k match by not contributing enough — it’s free money and all). After you get that debt taken care of, then you can reassess how best to allocate your income, but sticking with your same low living expenses will always serve you well!
Automation is my saving grace. The moment I increased the amount of my automated savings, I was able to live well below my means and gradually learned to detach myself from unnecessary shiny things, and of course, saved heaps. The challenge for me this year is to push myself by increasing my automatic savings a bit more even without getting a raise because my spreadsheet says I can actually do it.
Happy new year, guys! I wish you all the best this year! :)
So awesome that you can boost your savings even without a raise — I bet this won’t be the only time you see that happen. When you have bigger goals in mind, suddenly more and more expenditures show themselves to be unnecessary. Here’s to a great 2016 all around! :-)
Great solution, thank you for an excellent article.