Here’s The Real Reason You Have No Savings
We have a savings problem.
But I think I’ve found the answer — and it has nothing to do with your income.
Let’s be honest — saving isn’t exactly fun. It’s much more exciting to buy the latest tech, a new car, or whatever it is that floats your boat. I used to think so too. It makes me shudder when I wonder how much money I’ve wasted since I started working. I vividly remember the day I got my first paycheck.
I saved it. After all, I was earning £4.80 per hour, it wasn’t exactly a lot.
Then I saved the next one.
And the next one.
Then a really nice TV went on sale, I blew £500 on it and was back to square one.
A Fresh Perspective
I read a lot about personal finance. A few months ago I made it my goal to retire from full-time employment at the age of fifty, if not before — a goal I believe is perfectly achievable with the right saving and investment strategy.
I recently stumbled upon a personal finance blog called ‘Collaborative Fund,’ and in one of the posts, I found the following paragraph:
“Spending above a certain level of basic needs/leisure is mostly ego and social climbing. So savings is just a diversion from boosting the appearance of your status today for more productive use tomorrow. When you define savings as the gap between your ego and your income you realize why many people with decent incomes save so little. It’s a daily struggle against instincts to extend your peacock feathers to their outermost limits and keep up with others doing the same. ” — Morgan Housel, 2019.
Once your basic necessities in life are paid for, i.e. food, shelter, clothing, anything else is probably something you don’t really want or need.
Look at it this way. If you decide to buy a new Audi instead of a Toyota, you do it for one of two reasons:
- You think it will make you feel better about yourself.
- You think it will make other people look more favourably upon you. Owning a luxury car is a perceived symbol of wealth, which we equate to success.
Both cars will get you from A to B. But it’s the boost to the ego and your social status that means most people would choose the Audi over the Toyota.
I know people who buy the brand new iPhone every year on the release date. It doesn’t matter that it doesn’t do anything significant beyond the previous model. They buy it for the perceived social status that comes from owning the newest and most expensive smartphone.
Housel defines savings as “the gap between your ego and your income.” We place far too much importance on buying the biggest house or the newest car, not because we really want or need them, in many cases not even because we can afford them — but we want to be seen to be keeping up with everybody else.
“Too many people spend money they don’t have buying dumb s**t to impress people they don’t even like.” — Gary Vaynerchuk
We’d all be much better off in a world where the concept of credit didn’t exist. If you couldn’t take out finance to buy luxury items like expensive cars and smartphones, people would be forced to live within their means, and we’d see the real picture of wealth. There wouldn’t be any “keeping up with the Joneses” in a world where you can only buy what you can afford.
I’m not saying that nobody should ever spend money on nice things. I’m saying that you should truly consider your motivation for buying them first. Is it something you truly want or need, something that will benefit your life in some way? Or is it something you’re buying because all your friends have one? Something that you can’t really afford, but you could put on a credit card?
I recently bought a pair of BOSE noise-cancelling headphones, because I found myself getting distracted by the noise in the house when I’m trying to write or if I’m working. They cost more than I’ve ever spent on a pair of headphones, but I use them every day, and I couldn’t be without them now. More importantly, I bought them for me, because I had a want and a need for them, not so I could show them off to other people.
Consider how much money you could save over a lifetime if you only bought the things that you truly want or need.
My Takeaway Tips
- Stop letting your ego control your financial decisions.
- Stop giving a damn what other people think about the car you drive or the phone you have. Seriously, stop it.
- Start taking the time to consider the purchases you make, and whether or not it’s something you really want. A common piece of advice is to consider every purchase for 24 hours before you buy. The chances are high that after sleeping on it, you won’t even want that item anymore.
Take my advice. You might have to make the things you own last a little longer. But put the money you save to good use. Invest it. Buy assets. Repeat for the next three decades. And while your neighbour is driving around in his shiny new car, that he’s financed up to his eyeballs to pay for, you and your early retirement will be laughing all the way to the bank.
In your Toyota, obviously.
Jon Peters is a freelance writer who lives in sunny Cornwall, UK with his wonderful wife and two (mostly wonderful) children. If you enjoyed this article, you’ll love my other work, which you can find here. Thanks for reading.