How we save
Remember when you were young and really wanted that radio-controlled car? Your parents wanted to teach you the value of saving. They offered to pay for half, if you saved the rest. So diligently you put away your monthly pocket money until three months later, you saved enough to contribute your half. You hardly had any treats during the three months and all you could think about was the end goal. You bought your radio-controlled car and for the next two months you played with it religiously. Then one of your friends got the latest SEGA (or Sony Play Station for the younger readers) and the cycle repeated itself.
This is how we spend money. We go from one purchase to the next and it feels like we are progressing because the purchases become larger every time. Then, a few months later, we are as happy as before we bought the item. This is called hedonic adaptation, which implies that we have a steady-state happiness. Any positive or negative events in our lives only affect us for a period. After this we return to our steady-state happiness. Some people are just happy, and you can’t do anything about it.
It is the same for our purchases, we struggle to get long-term happiness from it. Then we end up resenting ourselves for the purchases we made. We also need to buy more extravagant things to scratch that itch. This is why it is ridiculously difficult to start saving and consistently grow our retirement savings. We do not get that fix. We feel like we are pissing money down a bottomless pit, that just does not want to fill up. What we as insatiable humans need is that pot of gold at the end of the rainbow.
Fooling your mind into saving
I think that this is one of the reasons why people prefer saving for retirement by buying property. It is tangible. You can save the deposit, attorney and transfer fees and buy the property. Then you can start saving for the next one. I used to do this but have switched over to an equity retirement strategy. This means that my savings are simply numbers on a spreadsheet. To combat this I have a few saving tips. Firstly, I get emotionally involved in the companies that I own. Yes, I predominantly buy Exchange-Traded Funds (ETFs), but I know which companies these are invested in.
For instance, I own a lot of Ashburton Global 1200 ETFs. This means that I get exposure to America, Europe, Japan, Canada, Australia and South America. The fund gives me exposure to 70% of the worlds market capitalisation. The largest holdings in the fund are Apple, Microsoft, Amazon, etc. So, I treat these like I’m the owner. I know that when these companies perform well, my fund will perform well. So, I actively follow them and that gives me my fix. It is even more rewarding to research a company’s finances and business model and then to invest in it. You get the satisfaction of seeing it grow knowing that you identified it as a good company, worth investing in.
Visualise the future
One of the other saving tips, is to visualise your retirement. My retirement is going to be a series of travel adventures. The cover image for this post is a place called Cappadocia in Turkey. Cappadocia was formed by the eruption of three volcanoes covering the region in ash. Over the centuries, erosion has carved away the compressed ash to form small peaks, called fairy chimneys. These are hollowed out and serve as houses to some of the Cappadocians. This is just one of the many cultures I want to immerse myself in while not being bound by a country or job. I want to retire before 45 so that I am young enough to hike to remote places.
In the meantime, I still travel, but tend to visit the cheaper places first. Next up is a visit to Egypt for a felucca cruise along the Nile. The point that I am trying to make is that you need to know what you are saving for. Be it owning a vineyard in Italy and producing exceptional local wine, touring the world’s best golf courses, living on an exotic island, hiking to historic places like Machu Picchu or whatever your heart desires. You need to sculpt your dream and save for that. Visualising the end goal is how you motivate yourself to save for that future. It all starts with asking yourself: “If money was no object, where would I be?”
Article reposted with permission from the Tigers on a Golden Leash blog.