One and done. That’s how I like to make my transfers into savings: Amass a few thousand bucks, and send that healthy portion into savings. It just feels better to make big transfers — and if you’re familiar with freelance finances, you know the feeling.
Unfortunately for me, many psychologists have proven there’s a better way. Turns out, if we don’t move small, regular increments into savings often, we might be leaving a lot of cash on the table.
What’s the Right Approach to Saving?
Saving up a hoard of cash before transferring it into a savings vehicle can backfire. Here are a few reasons why:
It doesn’t build a habit. In his book, “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy,” Thomas J. Stanley, Ph.D., claims that the factor that indicates a person is more likely to build wealth is not education or income level — it’s habitual saving over time.
It doesn’t produce emotional momentum. After the big transfer, there’s a certain letdown. On the other hand, psychologist Utpal Dholakia, Ph.D., explains that people who save smaller increments more regularly experience a heightened sense of financial well-being.
It doesn’t earn as much. You already know how interest works. But do you know how compound interest works? When you accumulate funds without putting them into a savings vehicle, you’re leaving compounding cash on the table. That’s because your money isn’t earning the highest interest rate it could. Worse, that interest isn’t earning interest, either.
As a freelancer, you need to build strong habits into your routine. Establishing consistency in savings won’t only make you feel a sense of accomplishment, it’ll help you weather the ups and downs of the independent lifestyle. After all, your money should be working for you — you did work hard for it.
The Benefits of Small, Regular Savings
Now that you know the potential pitfalls of waiting to save, what are some of the advantages of continually throwing smaller — sometimes even tiny — amounts toward savings?
You’ll experience less financial stress. Frequent, automated, strategic savings habits can diminish a person’s perception of financial hardship. In other words, the more frequently you save, the better you feel about your overall freelance finances.
It’ll be easier to make better financial decisions in other areas. When you save first, other decisions tend to be less complicated. Think about the last financial choice you struggled to make. Would your options have been more clear if you knew you had a set-it-and-forget-it savings plan in place?
The more you do it, the easier it is. Who do you think has more trouble sustaining a regular savings plan? The person just starting out, or the person who’s been doing it for a year or two? Obviously, once you get into the automated stashing habit, it’s a lot easier to maintain.
It builds up more quickly when it’s automatic. Only one in 10 regular savers report feeling like saving weekly or monthly feels like a sacrifice. The vast majority of people who save a little every day or week don’t feel the pain. When you’ve automated a regular transfer into savings, your mind is free to concentrate on other things. And when you’re focused on building your business, time flies. Imagine lifting your head one day, checking your account and realizing there’s more in there than you could have amassed manually.
It changes you. Dr. Dholakia’s research also found that people who save regularly tend to be more patient, and more able to delay gratification. And that means they make financial decisions that benefit them more in the long-term. If freelance budgeting and saving can help you improve your character, each allocation is an investment in yourself.
The temporary feeling of achievement that comes with a large deposit into savings is exactly that: temporary. Small, incremental, regular transfers into savings may not give you that instant surge of gratification, but they will give you long-term security and peace of mind. Over time, saving regularly adds up to much more than the occasional large contributions — and that’s what counts.