Jun 19, 2024
Saving money can be hard, even when you know how important it is. But what if there was a simple, hands-off way to set yourself up for financial success?
New York University professor and financial expert Scott Galloway recently suggested one: forced savings.
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But what does that mean, and how could it help you improve your finances? Here's what you need to know.
Stop fighting against consumption
Galloway was interviewed by Mayim Bialik of "Big Bang Theory" fame on her podcast "Breakdown," and he shared some financial advice with listeners.
Specifically, he warned that you should be wary if you have an impulse to spend any money you have access to and instead "find forced savings vehicles."
As Galloway explained, the U.S. economy runs on a consumption mindset that's really hard to fight and resist spending money on material possessions people think will make them happy.
However, if you take those dollars away from yourself, removing the ability to spend and instead putting your money into worthwhile assets instead, you can set yourself up for financial success.
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How do you force yourself to save?
Galloway explained four common methods of forced savings that it's pretty easy to take advantage of.
- Equity in a company: Some employers allow you to take part of your compensation in company stock. You can't spend your shares but over time they can go up in value and build your wealth when you eventually cash them in.
- Buying a home: "A house is forced savings because most people are worried about losing shelter so they’ll find a way to make their mortgage payment," Galloway told Bialik. If you commit to a mortgage, each payment builds equity and in the end you have a valuable asset.
- Retirement accounts: Galloway suggested signing up to have money taken out of your paycheck and put into a tax-advantaged retirement plan — ideally, this would involve employer match contributions. If your employer takes the funds from your check before you receive it, you can't spend it.
- Rounding up: Finally, he advised signing up for a program that some banks and apps offer that can round up your purchases and deposit the extra change into savings or investment accounts. So, if you spend $5.50, you'd have $0.50 go into your one of those accounts automatically.
In all of these examples, you take away access to some of your money so it's safe from being frivolously spent. These funds instead go into assets that could grow your net worth over time.
Set up your own forced savings program
If you are in a financial position to buy a home, every mortgage payment adds to your equity and you'll also benefit if your property goes up in value over time. The same can be true for company equity — you avoid spending and hopefully your shares will be worth more as your company grows.
Of course, making automated contributions to retirement accounts and savings accounts are good ideas, too. In fact, you can go a step further and arrange to have a set amount withdrawn from your bank on payday and put into a savings account. If you do this on top of making 401(k) contributions through your employer, you'll build your short-term savings as well as your nest egg for the future.
Taking away the choice of whether to save or not could be a ticket to financial success since you won't have to make yourself responsible for saving money every minute of every day. You'll create a status quo where building wealth is the default and you just have to stick to it.
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
