“‘Save’ – the sum of all financial planning wisdom in one word.” – Phil DeMuth
In a recent survey the Federal Reserve board asked Americans how they would pay for a $400 emergency. 47% responded that they would either have to borrow the money, sell something, or they didn’t know what they would do. In other words, almost half of Americans don’t have even a basic emergency fund to cover life’s small disasters. If your financial situation is that fragile it’s time to take action to change it.
If you are among the 47% that don’t have a $400 dollar emergency fund you likely think it is because things are so tight financially there is just no way you can save anything. Is this really true? Before you answer that question consider the poor in Bangladesh.
Muhammad Yunus, micro-credit pioneer and Nobel Prize winner for his work helping the destitute in Bangladesh escape poverty, described in his excellent autobiography, Banker to the Poor, how even the poorest of the poor in Bangladesh find a way to save. Although many of them struggle to get enough to eat each day, on days when they do have enough to eat (not excess, but just enough) they take a handful of the rice from that day’s meal and put it in a storage container. Over time they can build up a substantial reserve to get them through the times when they don’t have enough. This custom is called mushti chal, or “handful of rice.”
When Yunus started his micro-credit program in Bangladesh he had borrowers save 5% of every loan they received. He explained to the loan recipients that this served the same purpose as saving a handful of rice each day. The poor in Bangladesh, already used to the custom of mushti chal, readily understood the wisdom of this. If the poor of Bangladesh can save a handful of rice each day, and 5% of the micro-loans provided by Grameen Bank, the institution Yunus founded to help them escape poverty, there are not many excuses left to keep us from starting and adding to a small emergency fund.
The “Handful of Pennies” Savings Plan
What if, instead of saving a handful of rice each day, you saved a handful of pennies; 100 of them to be exact, or a dollar a day? After just one year you would have almost $400 saved up for emergencies and it would be practically painless for you. This simple act would make you better able to handle a small emergency than almost half of all Americans.
Of course, logistically, saving a dollar a day in cash would be kind of difficult. You would have to remember each day to save a dollar and hope that you had the cash on hand. You are much more likely to be successful in the long run if you set up an automatic transfer to a savings account of the appropriate amount each time you get paid. This is simple to do at the website of just about any bank.
How simple? I use a Capital One 360 Savings Account for my emergency fund. They pay an interest rate several times what your local bank is likely to be offering and you can open up an account online and set up an automatic transfer from your checking account to coincide with the dates you get paid in only a few minutes. Simply go to the website using the link above and click on the “Learn More” button in the middle of the screen. In practically no time your very own handful of pennies savings plan will be up and running. It truly is simple and painless.
Saving is a “Keystone Habit”
After just over a year on the handful of pennies savings program you will have a $400 emergency fund in the bank. That is a great thing but in the process you will have gained something far more valuable than that. You will have established the habit of saving part of everything you earn, which is a foundational habit of financial progress and a keystone habit of a successful life.
In his book, The Power of Habit, author Charles Duhigg describes the concept of keystone habits. Duhigg states, “Some habits…matter more than others in remaking lives and businesses. These are ‘keystone habits’ and they can influence how people work, eat, play, live, spend, and communicate. Keystone habits start a process that, over time, transforms everything. Keystone habits say that success doesn’t depend on getting every single thing right, but instead relies on identifying a few key priorities and fashioning them into powerful levers.”
Exercise has been identified as a keystone habit. Researchers have noted that when people start a regular exercise program they also start eating better, sleeping better, and using credit cards less. Keystone habits often consist of “small wins” that happen on a regular basis. These “small wins” in one area of our life give us the power and confidence to improve, almost subconsciously, in other areas.
Having family dinner together has been found to be a keystone habit in raising well-adjusted children and making your bed each morning is correlated with higher productivity. These habits don’t necessarily cause the related outcomes, but, in the words of Duhigg, they “help other habits flourish by creating new structures, and they establish cultures where change becomes contagious.”
I believe that saving part of everything you earn, even if it is a very small part, is just such a keystone habit. Once you set up a savings program and see some results you will notice yourself making other changes, both in how you handle your money and in seemingly unrelated areas of your life. Over time these changes can transform both your finances and your life.
Of all the possible keystone habits you could implement setting up a handful of pennies savings program is perhaps the easiest one. This is because you can automate it. You only need to make the decision to save once, but the benefits are ongoing. And to think that all these benefits can be yours for only a dollar day.
So what’s holding you back? Don’t wait until you can start saving substantial amounts. Transform you financial future by starting your very own handful of pennies savings plan today.
I think the “dollar a day” idea is best if you truly are down on your luck and CANNOT save any more than one dollar each day. Most people actually could save far more than this amount, but can’t see a way to cut out the unnecessary expenses first to make room for more savings.
And getting out of debt is also the best way to build your savings, too. Those $300/month payments on loans could instead be put into your savings account.
I agree saving more is better, but you have to start somewhere. For someone not saving anything establishing the habit of savings is more important than the amount.
What’s sad about that statistic is the fact that $400 is so very far from an actual emergency fund, typically defined as at least three months of expenses. For a typical househould, three months worth would be $12,000 to $15,000. And half don’t have $400.
I’ll bet the vast majority of your readers have it, though.
Cheers to us!
-PoF
I can definitely agree on the exercise as a keystone habit. When I was training for a marathon, I had to eat better or I felt awful when I ran. There was no other choice.
Thanks for sharing. I love the idea of keystone habits. Once we start doing good things we can build momentum.
Automating the savings doesn’t sound like building a habit but a change in the system that makes it happen. If only productivity can be so too.
I see your point but don’t necessarily agree. Any habit we want to establish becomes easier, and more likely to last, if we make it part of a system. In fact, as Duhigg explains in his book, a habit is a system where we see a cue, perform a routine, and get a reward. An automatic savings plan simply automates this process. It makes it easier for us but we still get the reward. It is a habit in that we decide to do it, and we can decide to stop doing it. We can also decide to save more or less any time along the way. We are still in charge of the behavior. I guess the important part is that. whether we call it a habit or not, we get the reward. Thanks for sharing your thoughts.