In the lead up to Christmas we are always bombarded with sales messages. “Save 50% here!”, “Buy one get one free!”. These offers come to us with the promise of “saving” us money. Are you really saving money? Probably not!

It’s often the case that we end up spending, not saving as a result of these messages.

The reason is the Big “Saving Money” Scam – we are fooled (including fooling ourselves) into believing we are saving money by taking advantages of these offers. The reason is that we don’t realise there are actually three different ways to save money.

The Three Ways to Save Money

1) Wants-Driven Saving
2) Needs-Driven Saving
3) Cash Saving

1) Wants-Driven Saving

Ever seen a special offer that really grabbed your attention?! One like “60% off this plasma TV but only while stocks last!” “75% off this leather sofa – only for the next two weeks!”. You might already have a perfectly good TV and sofa but you don’t want to miss out on such a good deal right?

The fact is that the sales price is often just the real price or acceptable price to the retailer. For example have you have you ever heard of a sofa store where there isn’t a sale on?!

The sale price is often the price they need to make a decent profit. The law may have required them to sell that item at “full-price” for a time in some of their stores, but in reality they are happy with the sale price.

The reason this is important is because we are talking about “Wants-Driven Saving”. This is a saving on an item you are tempted to WANT but don’t really NEED. And what compels you to buy is the false idea that you are saving money in the future by buying the item.

Are You Realling Saving?
In actual fact you’re not saving money, you’re spending money – right now! Managing your money well relies on thinking about cash flow – this is a cash outflow from your monthly budget – not a cash inflow. This is a false or fake kind of saving, which will lead you to actually increase spending and most likely increase debt.

You are also being subjected to a sales trick called “creating scarcity”. The seller creates the sense that there is competition with others and that you may miss out on this wonderful deal since “the offer runs out soon!” or “all the items might sell!”

These purchases give us a momentary thrill, they make us feel good for a little while. And we quieten the little voice in our head saying “you’ve just spent money idiot!” by justifying it as “future savings” when nothing could be further from the truth.

The sad fact is that millions of people drive themselves into financial difficultly doing exactly this – all the while thinking they are being “financially smart”.

2) Needs-Driven Saving

Needs-Driven savings remarkably enough are savings based on items you NEED, not WANT. These are savings on items you would have bought ANYWAY, even if there was no discount or offer. For example this could be a two for one offer on groceries or a discount voucher for petrol.

These are real savings as you are reducing the amount of cash flowing out of your pocket – cash that would have flowed out anyway.

One of the best money saving tips is to focus on Needs-Driven Savings when you are being bombarded with savings offers. Filter through them and find the right ones.

For example my girlfriend was recently offered a card that gave 50% off at a lot of London restaurants, for a price of course. Now if we dined out a lot, and felt this was something that fitted under one of our needs, then the card might have been worth it. However interestingly enough the 50% discount didn’t apply on Fridays and Saturdays at most places, the days we were most likely to go out. And also we were able to get 50% off vouchers for most of our favourite restaurants anyway for free elsewhere – so for us that fell under Wants-Driven Saving and we didn’t get the card.

So Needs-Driven Saving does mean you save money. Now what to do with that cash you didn’t spend? Funny you should ask…

3) Cash Saving

This is what I would call really saving money. Taking money from your paycheck and putting it into a savings account. Why – because the cash is still there. It hasn’t been spent. It is earning interest. You have actually saved money which is now building on itself.

Part of cash saving can also includes paying down debt. This is because you immediately reduce your cash outflows when paying off debt. See my previous post A Guaranteed Profit On Your Money? It’s Possible!

So if you take the cash from Needs-Driven Saving and pay off debt, you not only save that cash, but also get a guaranteed return on it. Now doesn’t that all sound better than option 1 above?

The Challenge with Saving

The challenge for us is the balance between the three, particularly with Needs- versus Wants-Driven savings. For example what would you call saving money on expensive Christmas presents? Did you NEED to buy expensive presents in the first place? No-one’s immune to this by the way, myself I’m partially prone to spending on gadgets like the iPhone!

The answer is, as always, “it depends”.

It depends on your personal circumstances. If you are knee-deep in debt (usually because of Wants-Driven Spending!) then you will need to restrict yourself to spending on only the things you need, look for savings there, and focus on paying off debt. If you have more flexibility then spending on things you want isn’t necessarily a bad thing – so long as you don’t kid yourself into thinking you’re actually saving money… and so long as you are cutting unnecessary expenditure elsewhere.

Think about the last few times you were tempted by an “once-in-a-lifetime savings” offer? Did you really save money?