“A penny saved is a penny earned,” as Benjamin Franklin once put it. Or rather, did not. That’s a common modern understanding of Dr. Franklin’s advice from 1759.
From a 1900 edition of the book Poor Richard’s Almanack, the original goes like this: “A penny saved is two pence clear. A pin a-day is a groat a-year. Save and have.”
Leaving aside pins and groats — obscure British money slang — the first and last parts are easy enough. A penny set aside now becomes two in time (compounding doubles money over time) and saving now means having money later.
People like the “penny saved = penny earned” idea because it seems to give them permission to spend. Get a slight discount on that lunch order and you’re off the hook! Using coupons is the same as saving for the long term!
Except, of course, it’s not. Real saving is not spending less, it’s saving, putting aside money not to be spent and letting it grow on behalf of your future self. “Save and have,” as Franklin’s nom de plume, Poor Richard, explained it.
That means taking money out of your spending flow permanently. But how? Here are some simple tricks to fool yourself into saving more:
1. Automate saving at work
By far the easiest way to save more is to take advantage of a workplace 401(k) or 403(b) plan. Using the power of “out of sight, out of mind,” your savings goal is met by regular, equal deductions from your current pay. Since the penny in question is not there to be spent, it is de facto saved for future use.
There are two major benefits to this approach, besides automation. First, you get to save money on a tax-deferred basis, that is, Your income taxes are lower today. (If you have access to a Roth IRA, you can save tax-free as well.)
Second, most companies match your contributions up to a point and, increasingly, there are low-cost, efficient investment funds available inside workplace plans, such as index funds.
2. Automate saving at home
No workplace plan? You can still approximate the effect of a 401(k) by setting up a personal IRA at a bank or brokerage. Your employer should be able to write you two paychecks, one directly to your checking account and one to the retirement account, without much hassle. If not, ask your bank to automatically transfer money on or soon after payday.
The goal is the same: Get money out of your hands before it turns into spending cash, then adjust your lifestyle to what’s left over.
3. “Save more later” plan
Too hard to save today? Go ahead and set up either or both of the above plans at minimal levels (say, what you need to get the company match) and then direct your HR department to increase your savings amount with each raise. You’ll never notice the difference, and your savings habits will grow in time.
Ben Franklin famously enjoyed life to the fullest, no miser he. Unsurprisingly, he also retired rich.