When my kids were little, we would occasionally give them a few dollars as a reward. They would put the money in their pocket, then take it out and stare at it, then put it back into the pocket, and repeat. They clutched the money so tight for so long, it became a crumpled paper ball. They imagined the candies and toys they could buy and couldn’t wait to spend the money.
Money burned a hole in their pocket.
Most kids are like that. But many adults are like that, too! Why is saving money is so hard? How come the desire to spend is so unquenchable?
Daniel Chi
Human nature craves immediate gratification. Money in your pocket does not give you much gratification. It is what money can buy that gives you gratification—food, clothes, toys, entertainment, pleasure, etc. To delay that gratification is against human instinct—it is difficult and requires training and self-discipline. Delayed gratification is un-human and inhumane. We loathe it, we despise it, we don’t want to think about it. Forget it!
But can we forget it? Can we escape the reality? A recent survey shows that 63% of Americans live paycheck to paycheck; one-third are not saving any money; 57% don’t have the savings to cover even a $1,000 emergency.
This lack of savings can be detrimental to our financial health, which in turn harms our mental and physical health. Most of us have experienced, or at least observed, how a financial emergency can push our lives into distress: the car broke down and requires a repair, but I don’t have the savings to pay for the repair, so I put it on my credit card, or worse, get a pay-day loan; the interest charge on the loan snowballs and puts me further into debt; I am stressed, I can’t sleep well; I am sleep deprived and can’t perform well at my job; my boss gives me warnings, which makes me even more stressed; my head hurts and my stomach churns; oh, all the bills that are due; I feel sick …
A healthy level of savings builds financial resilience, which means that when an accident happens, you have the financial safety net to fall on and can recover from that accident. In this world, accidents happen. It is not a matter of whether, but when and how bad. We will inevitably fall. If we are resilient, we can help ourselves up and move on. But if we are not resilient, we will not be able to get up, and our lives may be permanently damaged.
Our savings is the financial safety net that will lessen the damage and help us get up and move on. That is financial resilience.
We all need to build financial resilience. How?
First, live within your means. Just because others have the newest iPhone, doesn’t mean you have to. Just because others drive fancy cars, doesn’t mean you have to. It is very hard to have this self-discipline in our consumeristic society. But if you want to build financial resilience, forget the Joneses and live within your means.
Second, save. If you live within your means, you will be able to save part of your paycheck. But if money burns a hole in your pocket, one solution is to not even let that money get into your pocket. How? Set up a savings or investment account and automatically transfer part of your paycheck into that account. All financial institutions offer this service. This is to automate your best financial behavior—out of sight, out of mind. How much to save? The rule of thumb says 15% of your paycheck, but anything is better than nothing. The rule of thumb also says that you want enough savings to last three to six months if you lose your income. I say shoot for six.
April is National Financial Literacy Month. Help yourself, or if you already know and do this stuff, help someone else develop and automate their best financial behaviors. At the Department of Finance at UNLV, we offer two financial-literacy courses: FIN 111 and FIN 112. The first covers a broad range of foundational topics; the second covers personal-investment strategies. Any community member can enroll as a non-degree-seeking student and take these courses.
After you save, you want to start investing. Over the past 100 years, the S&P500 index has returned about 12% per year. Assume similar returns for the future and if a 20-year-old saves $3 a day and invests at the end of each year, then by age 65, when they are about to retire, they’ll have $1.5 million.
Next month, I will write about the conspicuous phenomenon of inflation and how to protect your wealth from it.
Daniel Chi is professor and chair in the Department of Finance at UNLV’s Lee Business School.
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