I've read about it in some articles and I've seen some friends who have tried it.
The idea is that if you receive a $5 note, you put it in a piggy bank or whatever, to store it and at the end of the year, you open the piggy bank and voila! You got a load of savings.
Sounds reasonable right? Wrong. I find it totally lame.
Think about it. You receive $5, when you do your grocery shopping, although you should be using your credit card to maximize your rebates. But ok, let's say for whatever reason you receive $5. You don't spend it. You keep it in your wallet for the time being til you get home. Then you go home and drop it in the container. Ok well done today.
Tomorrow, you go about your daily life and you run out of money, you just go to the ATM and draw more money, then you go and buy your lunch from the hawker center, and you get another $5. Wow, well done, you go home and drop the money in the container again.
Day after day, you do the same thing, and at the end of the year, WOOHOO!! Boom town. You open the container and there you see $2,000 or whatever amount. Sounds legit?
Did you notice anything wrong here?
Well... if you go about with your daily life, you don't change your habits. You don't change your spending habits either. You're just going to withdraw any shortfall which you have and continue to spend, or you're going to be spending on your credit card anyway if you don't have the cash. The $5 saved comes from the same place. It's not like it appeared magically out of nowhere. Meaning...
THERE'S NO DIFFERENCE!!!
You're "saving" the same money, or the same amount of money. It just looks like you "saved" $2,000 cos you stashed it in a box and now you can count it. But in truth, nothing has changed, you didn't stop yourself from buying anything right? You just continued your life like nothing has changed, you just kept $5 notes as "collectables". Nothing more.
Maybe a real challenge would be to carry only $10 in your wallet everyday, then only spend that amount on food court food for lunch. You know. Like when you were in school. Then everyday, it get's refreshed to $10 again, and you save whatever excess left after lunch. Ok, now, that's a challenge cos I know some folks who spend easily $15 if they go to a Korean restaurant during lunch plus drinks. Or maybe you set a clear $300 as lunch allowance for the month like when you were back in school. And the amount is budgeted from all your spending. So you have to count along with your credit card spend and cash. The problem is once you allow credit card usage, more often than not, people will lose discipline. Oh just once, I'll just swipe the card, what's another $20 for a nice meal, it's been a rough day.
So as you can see, if there's no change in spending patterns, there's no additional savings.
It would be cool to live like a school kid again, and give yourself a monthly allowance for lunch money and try to live within that. It needs to be challenging enough and yet not punishing. Just lunch money. Live the weekends normally and everything else, just keep it constant.
Maybe a good amount for lunch money would be 4x $5 and 1x $15. So $35 per week? ($140 per mth)
4 meals at a food court and 1 meal at a nicer place. Not too tough, at least I think it's not too tough.
Then if you don't spend it all, you can roll over to the next week. Hey that's a benefit, you can eat something nicer.
And to add another challenge, you can challenge your partner at the same time. Maybe at the end of the month you can see who has more left and the loser has to double the larger amount into the joint account. And the winner can just contribute the saved amount into the joint account. If the loser has exceeded the budgeted amount, then the loser needs to pay 100x the winner's amount.
This is a punishment to prevent conflict of interest. One party might decide to heck care the game and just anyhow spend, cos double of the winning amount isn't a lot, cos it's what's left at the end of the month, which would probably just be $10-$20 left out of the $140 budget.
(Note that the $10-$20 is just what's left of the allowance, not the total savings. Total savings is what you regularly spend minus the budget minus the $10-$20. That's the real savings, which could be quite a lot cos most people don't track their lunch spending very well, cos it's always just a couple of bucks here and there, so much so that $15 is also just couple of bucks.)
Then at the start of the next month the challenge starts again. Now THAT'S a challenge. Not just saving $5 just cos you got it as change. The money comes from the same place. It's either going to be that you use your credit card when you run short of cash, or you're just going to withdraw something that isn't a $5 note. So there's no real point to it.
Real savings come from the act of delayed gratification. That's the whole point of savings and investments. It's not about just switching from one denomination to another. Or from one payment mode to another.
Another method of savings, which I have tried, but is quite extreme, is something I call forced poverty. I have multiple bank accounts. So my salary used to go into one account, and then I have another account which I call the "float account" and I use it for all transactions, paying off my credit card bill, etc. So nothing actually comes out from the salary account. Every month, I would only transfer $2,000 into the float account and keep within the float, which included giving my parents the allowance, spending, eating, transport, phone bills, etc. So I always had to make sure that my float account had enough money to pay off my credit card bills etc.
Now, thinking back, $2,000 per month is pretty luxurious for a single guy living with his parents.
And now that I think about it, I used to do that for my girlfriend's (now wife) bank account as well.
Hmmm... $2,000 is also pretty luxurious for a single female who does not need to pay rent as well.
I think some people may think I'm lucky to have even gotten married considering how I was controlling her finances even before we got married. Anyway, now we're happily married and being frugal together.
So forget about the $5 challenge and do some real stuff to really affect your savings. Left pocket to right pocket isn't going to change anything.
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