[MUSIC] Hi, let's talk today about how we can build a good savings habit and what are some strategies that might help you work towards that. What we're going to do is we're going to start out talking about a concept called mental accounting that behavioral economists like to use. They can actually, when you understand it, help you to reach your savings goal and then we're going to talk about some saving strategies. They're sort of tried and true that a lot of people found, that helped them when they're trying to save money. And I'm hopeful that by the end of today's module or the whole unit, that you will be motivated to write your own savings goal and start working towards your dreams and goals. So, let's start with this concept of mental accounting. It's kind of an odd term, but what it really means is that if our brains are hard wired to think about things in certain ways and money is one of those, what we do with money is we tend to categorize it and we put it in different accounting modes in our mind that let us managed it. And the interesting about that is that we know from research that when people get money that sort of considered bonus money, it might be a bonus from a job. It might be a gift. It might be money that you just get unexpectedly. We treat that money differently than if it was money we have been receiving regularly, for example, in our paycheck. And what that means is that when people get this money, they kind of have to rethink how they're going to use it. And we typically, if you ask people what they do with money that's bonus, they end up just sort of spending it. Even when they had been focused on trying to work towards another goal, that bonus money can get them off track. But when you are aware of this, you can used mental accounting to your advantage and help it actually will help you works towards your goals instead of kind of working against you. So, good what I mean by these? How we can make mental accounting help us? One way is by making sure that we have different categories for our money and have not maybe set ups, so that we can work get that money into those right categories. So let's say, you have a category of money, which is serve daily expenses, the things that you need to pay to live. But you may also have a category that is for that goal, that special savings that you've got set aside. Maybe that's a spring break trip. Maybe it's a new car, but it's something that you said, this is what I'm doing with my money. Having that category there can really help you make sure that you have money put away for daily needs. Money put away for that special goal. And of course, also our emergency savings that we've talked about before. Is there a way that we can really facilitate this by maybe taking advantage of financial services? I think so. I think one of the things you can do is by having different accounts for this different buckets or categories of your different money uses. Let's give an example for maybe a college student. A college student probably has money that they need just to live on daily and that kind of things like buying food, transportation that might need to be in an account that you have easy access to like a checking account. But money that you need to be saving up for large expenses, like tuition or rent, you might want to have that in an account that's set aside. That's not in the account that you're dipping into all the time when you're just kind of going around your daily business and then you may also want to have a separate savings account for that unexpected expenses, those emergency savings that we talked about. By having money in different accounts, it means that you won't be so tempted to dip into an account that's for saving for something special, like tuition when you are trying to make a decision about what you want to do on a Friday night. What other strategies do we know that help families and individuals work towards their savings goals? One thing that is a very good strategy is to think about including saving in your budget or your spending plan. A spending plan is where you've divided up your expenses and your income into different categories, so that you can track your money and see where it's going. But what's really important is to make sure that saving is one of those categories, so that you're reminded to be putting money towards your savings and to have that be a part of your whole financial picture. Another excellent strategy is to think about tracking your expenses. Now tracking your expenses is a technique where you write down everything you've spent, every dime, every quarter for a certain amount of time. I'm not recommending that you necessarily do this your whole life, I think that would be overwhelming. But what it can be useful is for a month or six weeks and really see where is your money going, and is it going where you want it to go? If it's not going where you want it to go, then you can make some decisions and some choices to change patterns, so that you can have the money helping you work towards those dreams and goals instead of wondering, what did I do with that last $20 that I got out of an ATM? There are lots of different ways that you ca track expenses. Some people like to write it down on a piece of paper and a form, other people like to carry an index card and just write down their expenses that way. A lot of people are using their phones in order to keep track of it, either in a note section or if you have smartphone by using an app. We have lots of excellent apps out there that can help you track you expenses,. See where your money is going and make sure that you're having some of it directed towards savings. Where else can we find money to save? because so often, when I do talk to people, they say, I just don't have any money leftover. And so, I don't know how I could possibly work towards saving for a dream. Well, one place is look for money and maybe you'll find it there is to look at what kind of habits do you have where you spend money on a regular basis even if it's not a large amount of money, but you're doing it over and over again, because sometimes those small amounts really do add up. So let's say, for example, that you're spending $2 a day on something. It could be that cup of coffee. It could be a bottle of water. It could be something else. If you think about it even though $2 a day doesn't sound like very much. Over a year, you're going to be spending over $700 on that habit, whatever it might be. So, that's a good chunk of money. You could get a nice start toward savings, if you were to redirect that money you were spending on this habit in to a savings plan. Now you might be sitting there going, yeah, that sounds good, but I don't want to give that up. Maybe you don't. For me, I don't want to give up my cup of coffee. But if I'm working towards something that's important to me and I'm trying to save money for that, maybe I could modify that habit. Maybe I would say, it would be worth it to me to bring my coffee from home, save some money from that and at least have some money to start towards my savings goal. So, what is a habit that you have that might be spending money on, that you hadn't really thought about how much it would add up? Think about how much you spend, multiply it out over a year and think about how much that might really help you if you want to do something special instead. Let's take another example. We had a informal study done here at the University of Illinois at Urbana-Champaign. We went out and talked to students who smoke and asked them about how much did they smoke? And we multiplied that out and found out that on average, it was around $1,274 a year. If you multiply that out over a four-year college career, that's over $5,000. That is a lot of money. Is it worth another $5,000 in student loans? Or is it that information motivating enough to let you change that habit and put that money somewhere else? So again, what are your habits? What would you like to change in order to reach your dreams? We can take a look at research to find out work really helps people work towards their saving goals and there certain things that come out that are very clear they can really help people. One is start now and don't worry if you need to start small. What we see from the research is not that important the people start saving a lot of money when they start saving, but they need to start. Too often when I'm doing workshops and talking the people, I have people say to me, I'm going to save money when I have more money later on down the road and that really is not effective. What you need to do is start now even if it's a small amount. We've already looked at how small amounts can start to add up. The other key is to save regularly. Really need to make it a habit, so that it happens on a regular basis over and over. And that again, it's amazing how over time that can just to add up for you before you even notice it. I'm going to give you an example, so you can think about the power of starting small and saving regularly. Let's say that you had decided that you were going to save in your piggy bank a penny the first day. And then on the second day, you decided that you were going to save two pennies. On the third day, you're going to go ahead and you're going to save three pennies. And on the fourth day, you're going to save four pennies. [SOUND] What if you continue that and you save five pennies on the fifth day and you keep going forward? How much money do you think you would have at the end of the year? Stop and think about that, and write it down, and we're going to come back to this in our next module. [MUSIC]
