2 Weird Ways Americans Are Forcing Themselves to Save Money

I have read some headlines recently that show that 58% of Americans do not have $1,000 saved in their savings account. While there may be many reasons for this epidemic, today I’m going to focus on the idea that some people may spend most of what they have on hand and wouldn’t do so if that money was already set side for something else. Specifically, I’m going to talk about two unusual methods that Americans force themselves to save money (even if they don’t know they are doing it!).

The first method is very common, and I know many people who employ this strategy to keep their monthly budget in check, and it is: over withholding taxes. Now before we get into this one, I have to say that as a CPA, giving an interest free loan to the IRS is certainly not the best option, but for some, having the money taken out of their paychecks and held where they cannot access it is an easy way to save money. While people who do this are foregoing the return, they could get by having the money now and investing it, they are also ensuring that the money cannot be withdrawn for some frivolous, unnecessary purchase. After seeing the way some Americans spend their money, I have to say that although not ideal, this could be a practical solution to some people’s problems with saving money (as long as they don’t spend it all when they get their tax refund).

The second method is not for everyone, but many people save their money for the long term by paying their mortgage on a monthly basis, even if they don’t consider it a form of saving. When a mortgage payment is made, a portion of the money goes to interest, and a portion goes toward the loan principal. The interest payment is the cost of borrowing money, so the homeowner is trading that portion of the payment for the privilege to have a mortgage in the first place. However, the rest of the payment goes towards the principal of loan on the property. The difference between the home’s value and the loan amount is usually referred to as “home equity”, and by reducing the mortgage liability, they increase their home equity and the value they would receive by selling the property.    

Here’s a quick example:

Before the transaction, the homeowner has Cash and is ready to make the monthly mortgage payment of $1,000. Of that payment, $600 will go towards interest, and the remaining $400 would pay down the mortgage balance.  Now that the mortgage is $400 less, the homeowner would owe less in the event of the sale and therefore, he or she just converted $400 of cash into $400 of home equity, a relatively illiquid asset. While it may not be the simplest way to put money away, the homeowner is saving for the future by reducing the mortgage liability and will be able the recover those funds when the property is sold (and probably more if it increases in value over time!).

These two methods are not the first savings strategies you will likely employ, but it’s important to examine how they work so you can understand which scenarios these strategies may be useful in. The pattern in both of these methods is that the individual is saving money by making some sort of required payment: either the tax payment to the IRS or the mortgage payment. Do you have a common or uncommon savings strategy you want to share? Let us know by going over to the Contact page. Stay tuned for more content!