How to Start Saving for the Future

This article is an excerpt from the Shortform book guide to "The Automatic Millionaire" by David Bach. Shortform has the world's best summaries and analyses of books you should be reading.

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Do you struggle to save money? Can you think of some things you buy on a consistent basis that you could do without? How much money could you potentially save by cutting out your unnecessary expenses?

Many people struggle to save money on a consistent basis. However, saving for the future is essential if you want to accumulate wealth and retire comfortably. The first, most basic step to start saving money is to identify where you can (realistically) cut your spending—your unnecessary expenses.

In this article, we’ll discuss why people often avoid saving for the future, and how you can get started.

Saving Money: The Struggle Is Real

Author David Bach argues that financial freedom doesn’t come from how much you earn, but how you manage your earnings—if you’re not saving your money with your current income, you’re unlikely to save it in the future. This is because people often increase their spending in line with their income and always have an excuse to avoid saving for the future. The result is that many people miss out on a huge opportunity to enjoy financial freedom.

Why Do We Often Avoid Saving for the Future?

Bach believes we struggle to save money simply because we’re tempted to spend all of our money before we get a chance to save. But, according to Ramit Sethi, author of I Will Teach You to Be Rich, there’s a more complicated psychological reason underlying this tendency. Sethi argues that people tend to avoid planning their future finances due to:

Decision paralysis: When someone is presented with too many options for how to save, they feel too overwhelmed to make a decision.

Blaming the system: They choose to focus on economic disadvantages that they can’t control. For example, they believe that those born into privilege have more financial advantages than they do and develop a “what’s the point” mentality. Sethi advises you to switch your focus away from information-gathering or your disadvantages and start taking small proactive steps towards financial success.

Stop Wasting Your Money

Bach explains that the first step to saving millions over the course of your life is focusing on how much you spend—specifically, where you’re currently wasting your money.

(Shortform note: Bach understands that it’s not easy for everyone to increase their income, which is why he encourages you to focus on saving money regardless of your current income. If you do increase your earnings, Bach suggests that you funnel this extra money into your savings accounts instead of spending it. In contrast, Sethi advises that you maximize your earning potential so that you can spend more money on what you want while you increase your savings.)

Bach claims that we all waste money on small expenses that add up over time, such as the snacks you buy on your way to work, the unnecessary items you pick up when you go shopping, or the subscriptions you pay for but don’t need. For example, a Netflix subscription might seem like a small expense because you’re only paying $8.99 a month, but it adds up to $107.88 per year.

The sooner you identify your unnecessary expenses, the sooner you can eliminate them and put the money you save towards building long-term wealth. Bach suggests the following exercise: Track all of your expenses over the next few days and identify where you’re spending your money. If you tend to use your bank card more than cash, examine your bank statements.

Once you’ve collated all of your expenses, consider if there are any expenses that you can cut out or reduce. For example:

If you’re buying coffee on the way to work, consider making coffee and putting it in a flask.
If you’re eating out every day, consider preparing and packing your lunches.
If you’re buying bottles of water, consider filling a bottle with filtered water before you leave the house.

Choosing the Right Expense-Tracking Practice for Your Needs

In his book, Bach suggests you track your expenses for a few days to figure out where you’re wasting your money. However, this isn’t going to give you a complete picture of how you spend your money month by month, especially if you have irregular spending habits. To track all of your expenses over the long term, he recommends the Mint app. Sethi also recommends that you use similar apps to track your spending. However, in contrast to Bach’s argument that you should track with the goal of eliminating all unnecessary expenses, Sethi suggests that you track with a focus on spending mindfully. Split your expenses into four areas, decide in advance how much you want to spend in each area, then allocate a portion of your income to each:

Fixed costs (rent, living expenses)Investments (savings and retirement)
Savings goals (vacations and large expenses)
Guilt-free spending (anything that makes you happy).

He argues that this process is more effective than budgeting or eliminating expenses because you don’t waste time tracking where each dollar goes. In addition, you give yourself permission to spend a portion of your income in any way you wish, even if that includes unnecessary expenses. While this goes against common financial advice,
you’re more likely to stick to your financial goals if you don’t feel like you’re constantly depriving yourself.

Invest in Your Future First

Before you continue reading, you should have a clear idea of how you’re currently spending your money, a plan to eliminate unnecessary expenses, and have decided on a specific amount you’re willing to redirect towards your savings accounts. Now, we’ll explore why you should prioritize paying towards your savings before you pay for anything else.

According to statistics, the average American saves less than 5% of her earnings and one in five Americans don’t save at all. Why is it so difficult to save money? Many people add to their savings accounts as and when they have unspent money in their checking accounts. Bach argues that this doesn’t work because no matter how well-intentioned you are, more often than not you’ll find reasons to spend your money and won’t have anything left to put into your savings accounts.

(Shortform note: Furthermore, and perhaps even more worryingly, people tend to increase their spending the more they earn due to a phenomenon called “lifestyle creep.” The more they earn, the more entitled they feel to spend their money on things they formerly viewed as treats or luxuries. This increase in spending happens incrementally, so it’s often difficult for people to realize that they’re spending more and more on things they once found unnecessary. This is why Bach insists you should start saving regardless of your income.)

Bach explains that the only way to improve your financial security is to arrange to automatically save a portion of your income before you even have a chance to spend it. He claims that you’ll quickly get used to living without this money, and you won’t need to rely on sticking to a budget to build your financial security.

(Shortform note: Dan Ariely, behavioral economist and author of Predictably Irrational, offers clarity on why you’re more likely to achieve financial security by automating your finances. His research reveals that your emotions impact your spending decisions. You’re more likely to make irrational spending decisions when you feel emotional—in other words, when you see something you really want and feel an emotional urge to possess it. Your emotional side overpowers your rational side, and you’re less able to think about the consequences of your decisions. Automating your finances eliminates this possibility: You predetermine how your money is “spent.” so your rational side doesn’t have to fight with your emotional side about it.)

Bach suggests that you should aim to save at least 10-15% of your gross (before tax) income. For example, if you earn $20,000 a year, you should aim to save at least $2,000 a year which works out to $5.48 a day. (Shortform note: In contrast to Bach, many experts agree that you should aim to save at least 20% of your gross income. So, if you earn $20,000 a year, you should aim to save at least $4,000 a year which works out to $10.96 a day.)

How to Start Saving for the Future