How To Save Money

by Adam on June 23, 2010

Sometime you can’t just shout “SAVE MONEY NOW!” and expect it to work.

I was recently approached by a PHD student studying the psychology of saving with a view to helping more people save for the things that matter to them in life.

The student was interested in my thoughts on which psychological approach to saving is best: a linear or circular approach. Let me explain.

The linear approach

This approach sees life as a long journey and your savings goals are markers along the road that you must reach: You follow the linier path through life and save for key events accordingly.  Such an approach would therefore see retirement as a distant destination that needs to be saved for gradually over time. Or perhaps, as retirement is so far away for young people, other savings priorities, like perhaps a house or a car, take precedence because they help you have the things you need today.

A linear savings approach can be dangerous as it might be used as a crutch for people who can’t or don’t want to save for long-term goals now -they can justify:

“I’ll save for retirement later because I need to save for a house first”

They can prioritise what is more closer on the linear path -this focus on the short/medium term can be both good and bad -good because it provides focus, but bad because the long term future may be neglected.

Personally I find the linear approach really helpful. However, it works for me for two reasons:

  • Firstly I’m good at delaying spending (sometimes too good) so I appreciate it might be easier for me than others with more immediate demands on their money.
  • Secondly I’ve never had a problem saving for retirement. For me, it doesn’t seem that long away in the grand scheme of things and I’m amazed that others don’t want to take advantage of the amazing opportunity to compound savings over time. I don’t know why but this mindset is rare as most people can’t think of many things more boring than saving for retirement or they have too many commitments in the present to put money away for a distant, undefined future.

There is another approach to saving however that is more universal:

The circular approach

This approach is focused on today.

Rather than focusing on where you need to be in 10 years time, you look at this month’s income and save a proportion for the many different goals you might have.  You do this every month, reassessing your income and savings goals each month to help you reach your goals.

Whilst the Linear approach is great for some, I would imagine the vast majority of people would do well to follow the Circular method because it means you take action now. By focusing on the present, to what you can control, you are more likely to find yourself being successful at saving money.

Not Clear Cut

Of course, over the course of our lives, we all use both these ‘mindsets’: we need to look to the future but we also manage our lives day-to-day.

However it’s worth having a think about what works best for you. Do you perform better when you’re chipping away at a large impressive goal gradually over time? Or do you do prefer to have frequent smaller goals. The impressive large goals work really well for me but there’s a benefit to little monthly successes too.

When the student asked me which method I would recommend for my blog readers I told her it would the circular approach, particularly as the purpose of my blog is to get people to ‘start’ making more conscious saving and spending choices.

You can use “circular savings” if you find the future daunting. Whilst you might not know what your retirement will look like you can certainly start carving out a small part of your monthly budget for that purpose.

Circular saving makes budgeting more ‘real’ and gives you an element of control. The immediacy of the ‘circular’ method is therefore an appealing psychological approach to saving money.

So…given the above are you ready to SAVE MONEY NOW?! 🙂

{ 2 comments… read them below or add one }

Hope to Prosper

I think you have to do both to some extent. I use the Pay Myself First method, which is similar to what you call the circular approach. However, I always had short and long term savings goals (house, retirement & college funds), which need to be funded simultaneously. Foresaking long-term goals for short term ones doesn’t make any sense to me.


Thanks for the comment. You’re right that you have to do both. What I was trying to get across was the two different ways to think about your goals: long journeys, or regular smaller ‘walks’. For me I’m not dishearted by chipping away at large goals, but others might prefer smaller rewards to tick off.

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