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Spend now or save for later? How to do both

The following article is written by lecturer in financial planning Dr Campbell Heggen from Deakin University’s Faculty of Business and Law.

It can be very easy to live week-to-week and not really think about how your choices today might impact your future. But the reality is, small changes in your spending behaviour today can make big differences down the track.

Unfortunately, our brains are hardwired to place a greater weight on the present over the future when making decisions (i.e. we focus on the party, not the hangover). This means we find it easier to prioritise smaller, more immediate rewards over larger, slower ones – like long-term savings.

Many experts swear by budgeting – and I agree that understanding where your money goes can be great to identify opportunities for saving.

But let’s face it. Budgets are boring. And sticking to a budget is about as much fun as counting calories (pass the bacon please). So if you find satisfaction in spending, how can you find satisfaction in saving?

How to re-frame your spending habits

Cutting back on your spending doesn’t necessarily mean giving up the little luxuries in life we enjoy. Often there is a lower cost substitute which can replace some of our mindless spending behaviour.

For example, purchasing your daily $3.50 coffee quickly adds up to $24.50 per week. If you forego one coffee per day and deposit $24.50 per week into a savings account earning 2.5% p.a., in one year you will have accumulated $1290 in savings. Not exactly small change.

But if you’re anything like me, giving up your morning coffee is simply not an option (and frankly, neither is drinking instant coffee). There are a number of alternatives for making freshly brewed coffee at home. I personally use a 2-cup moka pot (macchinetta) and a stainless steel insulated thermos for my commute. A $10 bag of ground coffee beans keeps me caffeinated for about two weeks (that’s about 20c per coffee), saving me well over $2000 each year compared with the takeaway option.

Even if coffee isn’t your forte, the same principles apply elsewhere. Spending $10 on lunch two to three times per week could end up costing you more than $1500 per year. You’ll save a lot of this money by simply taking a few minutes to prepare a delicious packed lunch before you leave home in the morning.

'Cutting back on your spending doesn’t necessarily mean giving up the little luxuries in life we enjoy. Often there is a lower cost substitute which can replace some of our mindless spending behaviour.'
Dr Campbell Heggen,
Deakin University

How to grow big things from little things

Behavioural science can help us make small changes with big impact on our long-term savings goals. Here are some of my favourites:

Think about your future self. Visualising your future life and actually creating tangible goals is one way of making it more ‘real’. Creating big, ambitious goals is fine, but breaking it down into smaller, short-term goals will help you stay on track.
Pay yourself first. Make use of auto-deposit features to pay regular instalments into a savings account – if the money comes out before you see it, you’re less likely to spend it.
Save your bonuses. If you’re lucky enough to receive a pay rise, make a pre-commitment to put part or all of that into your regular savings. This way, you’ll save more without feeling the loss of decreasing your disposable income.
Name your goals. Rename your savings or investment account to ‘House Deposit’ or ‘New Car’. This makes it easier to visualise what the money is for, and resist the temptation to withdraw those funds for anything else.
Repay your debts. If you have savings in the bank, but your credit cards aren’t always paid off, it’s likely you’re paying more interest than you’re earning. So prioritising debt repayment first will have a greater effect on your overall net wealth.
Avoid the tap-and-go trap. Research suggests that people who pay by credit card rather than cash spend more money. Why? Cash is more ‘real’ than card, and the pain is immediate versus delayed. Try committing to a set amount of cash to withdraw each week to cover your day-to-day expenses.
Make a game out of your spending. Take advantage of your competitive streak by keeping track of your monthly spend and trying to beat it. You can even give yourself a penalty or reward.
Make the most of your tax return. With the average tax refund in Australia now over $2000, using that money wisely can be a great way to either reduce debt or increase your savings.
Start saving early. Starting early means you can exploit the power of compound interest. For example, assuming an average annual return of 6.5%, if you begin saving $2000 per year at age 20 but then stop saving after 10 years (before turning 30), you’ll accumulate more wealth at age 65 than if you begin saving $2000 per year at age 30 but then continue saving for 35 years until you turn 65. (i.e. 35 years of saving versus 10 years of saving).
Reward yourself. Allowing yourself a small splurge now and then, as a reward for achieving your short-term goals, will keep you much more motivated to get to the next milestone.