Forced scarcity in personal finance is a powerful tool to help you reach your financial goals. Forced scarcity tricks you into thinking you are broke, which results in you striving to earn more while spending less.
The process of applying forced scarcity to your finances is simple. In this article, I will show you the steps and how they impact your savings and spending.
Forced Scarcity Meaning
The meaning of forced scarcity is intentionally creating the illusion that money is scarce. There are several ways to accomplish this but the result is your money is out of sight and therefore out of mind. By “hiding” your money from yourself you create the motivation and pressure to earn more of it and spend less of it.
The psychology behind this is strategy has been discussed in numerous books but with a different term called “paying yourself first”. One of the best books that describe this concept is “The Richest Man In Babylon“. It’s a timeless book that helps you build a foundation for financial success.
Now I’ll go over some simple ways to set up forced scarcity with your finances.
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Apply Forced Scarcity To Your Finances
Now I’m going to give you quick steps of how to apply forced scarcity to your finances. Following these steps should lead to an increase in savings and earning potential which you can use to grow your wealth.
1. Pay Yourself First Into Your 401k & HSA
Paying yourself first into tax-advantaged accounts is the easiest way to start implementing forced scarcity. The money never goes into your checking account therefore you don’t even get an option to spend it.
By doing this you also save money right away on taxes. I’ve written in-depth about the best way to prioritize your investments and easy ways to automate your finances. Payroll deductions into your 401k and HSA allow you to pay yourself even before the government has a chance to take their fair share!
2. Transfer Extra Money From Checking To Savings
If you look into your checking account and see thousands of dollars, you are more likely to spend it. Similarly, you might also turn down the opportunity to work overtime if you know you have that extra money in the bank.
However, by transferring that extra money into your savings account, the money is “hidden” to you.
Next time you look at your checking account you might only see $300 for example and that could motivate you to work that extra shift or meal prep for the week instead of dining out.
The money is still in your savings account in case of an emergency and it will also be growing if you use an online savings account.
3. Live Off The Rest
The last part is to live off the remaining balance and repeat the cycle. Applying forced scarcity to your finances helps you live within your means and invest more. Over time this builds wealth and helps you reach financial independence.
Just as an example of how powerful forced scarcity is. If these steps help you invest only $159 per month starting at the age of 25, you can retire a millionaire!
By following the steps above you can trick yourself into earning and saving more. With the extra money you earn and save you can invest it towards a better financial future.
You can learn much more about Behavioral Finance at Investopedia.
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This information is my opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.