There are many reasons why at any time in our lives we think that it would be good to start saving constantly. However, although the objective to be achieved is clearly determined, many times we do not know how to start doing it systematically. To do this, we need to find a method or behavior that makes this whole process easier for us. A system that is useful in this regard and that makes it much easier for us to save every month is to use the pre-savings formula.
When an individual decides to save and does not have a consolidated saving habit, what he usually does is wait until the end of the month and see how much money he has left over and only then deposit it in an investment instrument. This usually happens this way because this is the formula that we have normally learned since we were little. In addition, we have to take into account that our brain is programmed to consume all the resources that it has around it or what is the same we are “programmed” to spend all the money we can and not leave any type of remnant in our checking account . The reason that explains this is that our brain always looks for the immediate reward versus the long-term gratification that the saving mechanism supposes.
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In this sense, the Marshmallow experiment that was carried out with several hundred children and which, simplifying it a lot, consisted of putting a candy on a table in a closed room, is interesting. In this room the walls were painted in a neutral color and apart from the table and the candy there was no other element that could serve as a distraction. Before entering the room, the child was told that he could eat the treat whenever he wanted, but that if he waited just five minutes, he would receive an additional treat. The decision to wait those few minutes would seem logical, but the reality that the experiment demonstrated is that only a third of the children were able to endure the required five minutes. We can think that this only happens when we are children. However, when we are adults this also happens, although to a lesser extent and it is that we must bear in mind that over the years we adults can develop the capacity for self-control or dominance over ourselves to a greater or lesser extent.
To avoid the possible temptations to spending that we receive from the outside world, it is when the pre-savings formula makes all its sense. This method consists of deducting a part of our salary at the beginning of the month as if it were another expense. Ultimately, it is about withdrawing from the money that we have available for that period a certain percentage of it. In this way we will not have the excuse that when the end of the month has arrived, our expenses have eaten up all our income and that, therefore, we have not been able to save anything.
We also have to bear in mind that the possibility of spending today is much higher than that which existed a few decades ago. On the one hand, leisure options have multiplied enormously and, on the other hand, because electronic commerce allows us to immediately buy anything from anywhere and on any day of the week.
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But how do we know what percentage we can pre-save without this causing us to significantly reduce our well-being? At this point we can use several techniques. The first we can define as the technique of trial-error and it would consist of withdrawing the first month in the form of a pre-saving of a very small amount of money. For example, it could be 1% of our income. The following month we would analyze how the month has gone us financially speaking and then we will evaluate if we can go further or not in our pre-savings. Suppose we decide that we can go further and double this amount to 2%. Then the following month we would reassess our financial scenario again and we would adjust our ability to save to our potential.
Another formula could be to create a budget at the beginning of the month and see what our income and expenses are. Once this is done, we would analyze in depth the item of expenses and determine which could be dispensable. Suppose that we could save 15% of our salary based on these calculations. That figure could be the one we withdraw from our available as soon as we receive our salary. However, it is advisable not to rush so much. During the month there are always unexpected expenses or we want to indulge ourselves and having some extra funds not budgeted could help us for this.
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In this case, we could pre-save 10% of our income and deposit it in a savings account from which we would channel our investments. The funds to spend on our daily needs would be in that operating bank account that is where we receive our salary and the money we save would be in another account that would serve as the basis for our investments.
In short, the pre-saving formula is none other than considering saving as one more expense and taking it out of our checking account at the beginning of the month when we enter our fees. It is about avoiding the typical excuse of waiting for the month to end and we tell ourselves that the expenses have been so much that it has been impossible for us to save. The best formula for this to work is for everything to be done automatically. That is, when I have already defined that my pre-savings will be x pesos per month, then I will order my bank to automatically withdraw that amount from my operating account and deposit it in my savings account.
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