Saving: The one-month get-rich plan

The secret of stashing away cash is thinking no more than a month ahead.

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Financial advisers and self-help books tell you that setting long-term goals is an essential step to increasing your savings. But is that really true?

Not according to Utpal “Paul” Dholakia, associate professor of management at Rice University in Houston. His research shows that savers who focus on the here and now succeed in putting away much larger amounts of money than people who set long-term goals. “Investors actually save much less and make riskier financial decisions the further out in the future their savings goal is,” says Dholakia.

In one of his experiments, savers who concentrated on savings goals one month in the future did an average of 14 times better than those concentrating on four-month goals. In fact, some of the short-term savers succeeded in saving $440 a month when their initial goal was only $287.

In sad contrast, those who were looking further ahead said they planned to save an average of $946 over four months, but managed to put away only a miniscule $123. “People don’t behave thoughtfully when it comes to setting long-term goals,” says Dholakia. “They’re driven by habit and they become overly optimistic. They also start relying on bonuses and future raises to meet their target, and very little money ends up being directed to actual savings.”

Dholakia’s advice? If your income fluctuates from month to month, set monthly savings targets at the beginning of each month. If you’re lucky enough to have a steady income all year round, take your annual target for savings (say, $4,200) and break it into a monthly goal — in this case, $350 a month. Then set up an automatic savings plan with your bank that will deduct the $350 from your paycheque every month. “That way, your savings targets always get met.”

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  47. actually – if you do a goal month to month it can actually work. for example, my savings goal this month is $300 US and $200 CAD – the $300 is for a trip I'm taking to the states in a few months to visit family (and I don't need to carry that much cash since I'm staying with family) and the $200 is to sock away in one of those ING/Ally GIc's (making sure I don't touch it for another 3 months). But that's only for this month –

    I already have $200 US saved, and approximately $100CAD. Next month I have another goal – work some overtime hours and put away $1000 in another short term TFSA GIC. I know it's not gonna earn much – but I've essentially told my brain that it cannot be touched and it's for a purpose in 3 months.

    In 3 months, I won't want to touch that money and will find any means I can to reduce my spending so that I can rely on my present salary to survive on, because I don't make a lot of money now. This is how, after pulling out $5000 out of my RSP last year I was able to pay it back with additional funds within a year. I'm still thinking long term, but actively short term to reach my goals.