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Make sure you don't spend the money you just saved

If you have ever cut back on indulging an expensive habit, whether it's twice-daily runs for a latte or a new pair of designer shoes every weekend, you will have noticed that the money saved adds up in a hurry. Unless you don't actually save the money, that is.

Often, I have heard of people saving money on one habit, only to use the savings for something else as frivolous. Instead of spending $100 a month on clothing, they might reduce that spending to $50 a month. But all of a sudden, $50 a month is now being spent on upgrading their cable package.

Over all, there is no savings. Just a rearrangement of how they spend their money.

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Consider someone who starts a new fitness regimen. Maybe they are lifting weights or running for 30 minutes three times a week. But if they feel famished after their workout and they head off to grab some fast food, also three times a week, they might not notice any change in their physical appearance. Had they not been working out, perhaps those treats would have added a chin. On the flip side, adding the workout while skipping the additional junk food might have resulted in a positive change to their physique.

It's the same idea with money.

Maybe you have negotiated the interest rate on your next mortgage to be 0.5 percentage points below your offered renewal rate. But unless you have a concrete plan for those savings, they can often find a way of being spent without your even noticing it.

In order for your sacrifices and hard-fought deals to mean something to your bottom line, you need to put the savings to productive use. Paying down debt, investing and purchasing insurance you have been procrastinating about are all good examples.

At some point, everyone has seen those opportunity-cost calculations that show you how reducing your expenses on activity X could turn into $100,000 in 25 years if you instead put the money in an investment portfolio. Generally speaking, the rate-of-return assumptions are on the high side to motivate you. That's all fine and dandy, but again, it assumes you save the savings.

If you are making a sacrifice to truly improve your finances, an easy trick to implement is to set up automatic transfers from your chequing account to your savings account that mimics your old spending pattern.

For example, if you are giving up a pack of cigarettes a day, you can set up a daily $10 transfer. If you are skipping ordering wine when eating out on Friday nights, you could set up a weekly $25 transfer. (Make sure that your banking package covers all the extra transactions before setting these up.)

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If you are cutting back infrequently, ING Direct Canada has a new feature on its mobile banking app that allows you to sporadically transfer money from your chequing account to various other accounts, with a twist. Called the "Small Sacrifices" tool, you can pre-enter how much you would save from, say, buying a regular coffee instead of a medium latte. Then every time you decide to make that sacrifice, you can log in and have the savings associated with that choice transferred to another account.

Not everyone is ready to go cold turkey with their pricey habits, but unless you actually save the savings, you're not making progress. Like eating a bacon double cheeseburger after a 10K run, that's a lot of pain with no real gain.

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