You got your salary – and the money vanished right away. Does this sound familiar? Especially in this DINK phase (Double Income, No Kids) most people have more money than what they require for necessities. Having just finished studies, it’s tons of fun going on brunches, holidays, or to buy that purse you’ve craved for years. Money tends to disappear faster than you can say rational consumer.
On the other hand, this is precisely the time when we should be saving for future consumption. But money is often spent on those all-important purchases, parties, and dinners, so you’re always planning to start saving just next month. But how can you save, if you spend all what you earn? The easiest way to get started is to make it automatic.
In the modern age of internet banking, creating a second account is usually free. To make the psychological effect stronger, you can rename the account, and call it Savings. Then you decide on a suitable savings percentage, say 15% of your net income, and set an automatic monthly transfer from your regular account to the savings account. If you time the transfer so that it happens the day after payday, you won’t have time to spend it all, before the saving kicks in. But what prevents you from spending all your savings, then? Not much. However, if you believe the research on psychology, the fact that you have to tap into an account called Savings will make you think twice, whether the item you’re about to buy is really necessary.
It’s possible to take the automatic saving a step further. Keeping your savings on an interest-free account is not very productive, rather you should invest them. There’s plenty of good books around about how to invest sensibly. However, our main thesis has been to invest small sums monthly, and put the money in ETFs. We use Nordnet’s service, where you can invest a certain sum every month, and it will automatically be put into four ETFs that you have chosen. (Nordnet is available for all Scandinavian countries, but I am sure other countries have similar services) The ones we use basically track indices, so they are passive and have ultra-low running costs. These kinds of investments are excellent for investors like us, who have no interest in analyzing price changes or financial news. The best thing here is the combination of two-step automation. First, money is transferred automatically to the savings account, and from there a part of it gets invested through Nordnet. Using this system, your savings will accrue interest nicely over the years, and it’s enough for you to look at the investment strategy for example twice a year.