The Ten Commandments of Spending and Saving
Be resilient, not fragile
Spending and saving are flip sides of the same coin — what you don’t spend, you save, and vice versa.
I've seen many strategies — stellar, creative, and works in progress. From these experiences, here are my Ten Commandments (okay, 14) on how to spend less, save more, and be financially resilient.
1. Pay yourself first.
The best way to save is to do so before you spend. Payroll deductions are most effective as they're effortless and invisible. When you divert money from your paycheck to your savings, you pay yourself first. The money never finds its way into your checking account; you don't see it and thus you don't spend it.
2. Use mental accounting buckets.
Remember the Christmas Clubs and lay-away plans of a bygone era? These were great mental accounting strategies where you save now and spend later.
Create savings sub-accounts for any categories relevant to you — e.g., down payment, car, vacation, Christmas, furniture, engagement ring, wedding, taxes, whatever. If you can, use payroll deductions to directly fund these accounts (see #1). If not, do automatic debits from your checking account the day after each paycheck is deposited.
Forget about buy now and pay later; instead, save now and spend later — a modernized version of a lay-away plan.
3. If you can’t pay in full, don’t buy it.
Don’t borrow for any expenses other than education, a home, or a car. For anything else, pay in full. If you don’t have enough money, see #2 above.
4. Set a spending target and track it.
Know how much you spend. Not every penny every day but, know your monthly total and whether you're hitting your target. If you don’t have a monthly spending target, set one.
If it helps, use an app, but even easier is to create the world’s simplest spreadsheet with the month as column 1 and your total spending as column 2. Fill it in every month. We all fool ourselves by thinking we spend less than we do; the numbers don’t lie.
5. Regularly re-assess variable expenses.
Most expenses are variable and you should regularly re-consider them. Some — e.g., gym and yoga, TV apps, Spotify — are short-term and easy to unplug. Others are medium-term commitments — e.g., an apartment lease or a car loan — but also treat them as variable expenses and force yourself to occasionally re-commit to those decisions.
6. Distinguish between discretionary ("wants") and mandatory ("needs") spending.
Define for yourself what's discretionary. Hit the "pause button" on all discretionary spending until your total spending is where you want it to be. If you consider none of your spending to be discretionary, you’re in a pickle.
If that’s you, re-visit your expense structure as you’ll need to spend less, earn more, or both.
7. Don't get on the hedonic treadmill.
As your income grows over time, don't allow your spending to grow proportionally. This is a dangerous hedonic treadmill that will be hard to get off. You'll have more stuff but you won't be happier.
Instead, when your income grows, save more. One way is to increase your 401K contributions whenever you get a raise. Another way is to save now for something you may want later (see #2).
8. Housing is probably your biggest expense.
Regularly reconsider your housing choice. For example, are you an empty-nester that can downsize; can you take on a roommate; are you now working from home permanently and could consider a lower cost area, move back in with mom and dad, etc.?
Don't assume your housing cost is immutable.
9. If credit cards are a challenge, use debit.
If you find yourself keeping a balance or over-spending with credit cards, put them away and go 100% debit. Save the credit cards for emergencies as the points aren't worth it. If you start feeling some anxiety every time you’re about to swipe your debit card, that's a feature, not a bug, of this approach.
Think twice before you swipe.
10. Tame social spending pressures.
Social spending pressure can be intense. Try sharing your concerns with friends and family and you may find that they’re relieved and grateful that you are brave enough to say something for which they are feeling the same pressures. If that's the case, unite in your efforts to save more and spend less. Reframe it as a positive goal for all of you.
Fight FOMO, YOLO, and peer pressure to spend; don't cave in.
11. Minimize debts.
Debt makes you financially fragile so avoid taking on any debt for expenses other than a car, home, education, and true emergencies. For anything else, pay in full with money you've already saved (see #2).
Being debt-free makes you financially resilient.
For existing debts, pay off the highest interest rate debt first. Student loans, taxes, and child support take priority because defaulting on those will get you into the most trouble. If you already have some emergency savings, pay down your debts more quickly, rather than saving additional money in a low-yield savings account.
12. Maximize employer incentives.
Your employer may offer you a 401K match, a contribution to a health savings account, or an employee stock purchase plan where you can buy company stock at a discount.
Take full advantage of the free money your employer offers.
13. Maximize tax incentives.
Similarly, the IRS offers various inducements to save. These include the well-known 401K and Roth IRA but also other options such 529 college savings accounts, spousal IRAs, health savings accounts for high deductible health plans, flexible and dependent care spending accounts, and Roth IRA conversions (which can make sense if your income is temporarily low).
Take everything the IRS offers.
14. Save windfalls; don't spend them.
Most of us receive windfalls from time to time. Whether they are birthday gifts, tax refunds, pandemic relief checks, work bonuses, inheritances, an extra paycheck in certain months, or anything else, don't spend them. Save these funds in one of your mental accounting buckets or pay down your debts.
Effective saving strategies are like other good habits you sustain over time — small improvements over long periods compound into big benefits, such as making you financially resilient.