This is a great start, but it doesn’t mean anything if you don’t actually put that money away. Instead, our natural tendency towards mental accounting may be eating into, or completely negating, our savings.
Mental accounting is our habit of thinking about our money differently depending on where it came from and what we earmark it for in our minds. This is one reason that people leave money in a savings account while still working to pay off high interest credit card debt. Mentally, we separate the savings money from the debt money. But in reality money is money is money, and by failing to pay off the credit card as quickly as possible we are wasting money paying unnecessary credit card interest.
Important to our discussion here, we also mentally separate money into current wealth, current income, and future income. Studies have found that we are far more likely to spend money that we mentally drop into the current income category. They have also found that small windfalls and unexpected gains, like the savings that we have discussed, will generally fall into the current income category.
What this means is that it is very easy to spend your newfound savings elsewhere. In the same way that you may go out to a nice dinner after getting an unexpected bonus, your brain justifies extra spending when you save money.
It is easy to think “I just saved $1000 by shopping around for a car, so we should take a vacation” or “Switching insurance providers saved us $150/month, so it wouldn’t hurt the budget to sign up for Blue Apron.”
And that is fine if that’s what you want to do with your money. If you want that vacation or if Blue Apron would improve your life and make you happier, then go for it. Just recognize that you are not saving your money. You are choosing to spend it in a different place.
If your goal is to save more money, then you need to mentally recategorize that money from current income into current wealth or future income. The easiest way to do this is to move the money into a different account. If you are trying to save for a car or a downpayment on a house, move your savings into a savings account as soon as possible. As long as that money is in your checking account, your brain will consider it current income and will want to spend it.
If you want to save for retirement, increase your contributions to your 401K or make a deposit to an IRA. If you are saving for other long term goals (or your retirement accounts are maxed) move the money into an investment account (and into an index fund).
These changes will perform double-duty. First, your brain will change its view of this money from current income to wealth or future income, making it easier to save your money and reach your goals. Second, you will see these accounts growing, which will motivate and encourage even more progress towards your goals.