Why cutting expenses isn't helping you save money

Why do people struggle to save money even when they are trying very hard to save money? I have a theory. Actually, check that, it's not a theory, it's a fact. There is a very big gap between not spending money and actually saving money. Let me explain.

Bob. Bob is going to be our example guy this week. Bob eats lunch out every day during the work week. He spends an average of $7 on every meal. This week he's decided he is going to cut back because he wants to save some money. He doesn't eat out once. In Bob's mind, he just saved $35. Problem is, he didn't really save the money, he simply didn't spend it. That $35 is still in his checking account and the next time Bob checks his balance he'll consciously or unconsciously notice it's about $35 higher. The next time he's faced with a purchase he'll consciously or unconsciously spend that amount, or more, because of the good vibes he's feeling from cutting back. It's called balance spending and we all do it.

Not spending money is great. Cutting expenses is great. But neither are saving money unless you take the next step. If on Friday at 1:00 p.m. after a week of not eating out Bob transferred $35 to his savings account then he would have truly saved $35 due to cutting back. Also, making a $35 payment on a debt would do the same thing, because it's all about net worth. As long as you are using funds "saved" through cutting back to forward your financial life you are doing the smart thing.

Then we come to my personal pet peeve, gas prices. Everyone loves to celebrate or complain about low or high gas prices. Personally, I don't care. But what irks me is when people say they saved $60 on gas this month. I can't help but think, did you really save $60 this month or did you just not spend it? Unless you are making a $60 deposit into savings or a $60 payment on a debt, you didn't truly save the money.

I've also seen people who use cash systems struggle with this. If you decide to spend $100 less on groceries this month, but you've already withdrawn the cash, the savings doesn't take place until you've redeposited the cash and then moved it to a savings account. Considering the extra step involved, it's less likely this money is getting saved and more likely it's getting spent on other things.