The Ten Commandments of Spending and Saving

Spending and saving are flips sides of the same coin. So, by definition, what you don’t spend, you save. In my interactions with clients and students, I’ve seen many savings strategies that range from stellar, to creative, to works in progress.From these experiences, here are my Ten Commandments (OK, 13) on how to spend less and save more.

1. Pay yourself first with payroll deductions.

The best way to save is to transfer it to your savings before you’re tempted to spend it. 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 you don’t spend it. See my next point.

2. Use mental accounting buckets to save first and spend later.

Remember the Christmas Clubs and lay-away plans of a bygone era? These were great examples of mental accounting.

Create savings sub-accounts for the categories for which you want to save — e.g., down payment, car, vacation, Christmas presents, furniture, engagement rings, weddings, taxes, etc. 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 first and spend later — a modernized version of a lay-away plan.

3. Set a target and track your monthly spending.

Know your overall spending. Not every penny every day but, you should know the monthly total and whether you’re roughly hitting your target. If it helps, use a phone app, but even easier is to create the world’s simplest spreadsheet with the month as column 1 and your total spending amount as column 2. Fill it in every month. We all fool ourselves into thinking we spend less than we do; the numbers don’t lie.

4. Regularly re-assess variable expenses.

Most expenses are variable and you should regularly re-consider them. Some — e.g., gym memberships, streaming 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.

5. 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 and you’re spending too much for your circumstances, re-visit your expense structure as you’ll need to spend less or save more, or both.

6. Don’t let your expenses grow proportionally with your income.

As your income grows over time, don’t allow your spending to do the same. 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).

7. Housing is probably your biggest expense item.

Regularly reconsider your housing choice. For example, are you an empty-nester; can you take on a roommate; are you now working from home permanently and could consider a lower cost area, etc.?

Don’t assume your housing cost is immutable.

8. 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 use debit 100% of the time. 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.

9. Tame social spending pressures.

Social pressure to spend can be intense. Try sharing your concerns with friends and family and you may find that not only do you get support but they may be relieved 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. Make it into a positive instead of being shameful.

Fight FOMO, YOLO, and peer pressure to spend; don’t cave in.

10. Minimize and manage debts.

Debt makes you financially fragile so avoid taking on any debt for expenses other than a car, a home, education, and true emergencies. For anything else, pay in full with money you’ve already saved (see #2).

Be financially resilient by being debt-free.

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, it generally makes sense to pay down your debts more quickly, rather than saving additional money in a low yield savings account.

11. Take advantage of employer incentives.

Your employer may offer you incentives such as 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 all the free money your employer offers.

12. Take advantage of tax incentives.

Similarly, the IRS offers various tax incentives to save. These include the well-known 401K and IRA retirement accounts but also other options such 529 accounts for college savings, 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.

13. Save windfalls; don’t spend them.

Most of us receive windfalls — large or small — 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, pay off your debts, or use them for emergencies.

Effective saving strategies are like other good habits you develop over time — small improvements sustained over long periods compound into big benefits.