The Psychology Of Saving

Do you have a healthy nest egg for the future, or are you consumed by too much current debt? Many governments around the world are trying to help their citizens avoid debt by developing a savings mind-set, along with the treasurer of Australia encouraging us to “work, save, invest”.

In an ideal world, we would all balance our spending with our saving, and, in that way, avoid becoming overly indebted.  Sadly, the reality is far from ideal.  People live above their means, putting savings at the end of their priorities list.  Often, it’s only once a person is in serious debt that they feel pushed to save in order to get out of the financial burden they have put themselves under.  In the meantime, they’re accruing interest on their debt as they slowly try to save.  Significantly, it all could have been avoided if savings had been considered sooner.

Saving is never quite as easy as it sounds, is it?

Psychology and the field of behavioural economics study how people think and behave, and both fields have been used to help people save, especially when it comes to retirement.  The Save More Tomorrow initiative in the States, for instance, used behavioural economics to help employees save.

The mental benefits of saving

The practical, monetary benefits are widely known.  The interest earned on savings is usually higher than the rate of inflation, whereas the interest charged on a loan means you often pay far more, in the end, than the amount you originally “borrowed”.  Savings can help you avoid resorting to credit, and if you save through investments, you help the economy through growing its investment capital.

There are however, the less known emotional benefits, which include peace of mind, and a satisfying feeling of control, that you are prepared for anything life may throw at you – whether it’s a job loss, a broken-down car, a medical emergency, a burst geyser…

One study on savings, by Capital One in America, found that only 10% of respondents felt saving to be a sacrifice, and even fewer said they felt deprived when saving (4%).  In fact, savings were shown to increase happiness – by 49% in men, and a whopping 58% in women.

Mental Blocks to saving

If it’s so beneficial, why do people appear less inclined to save successfully?  Why do they struggle to grow that nest egg?  An article in Psychology Today gives reasons people fail in their saving plans.

1. Unrealistic monthly goals, that are not, met tend to set up a failure mentality.  This often sees people spending even more that the amount they had planned to put away for the month.  However, if the savings goal is too low, it offers little by way of motivation. 

• The solution – pick a savings target that’s neither too hard, nor too easy, to reach.

2. People have a natural tendency to be over-optimistic about how much they’ll be able to save in the long term, and then fall way off the mark when they eventually reach a stated future point. 

• Conclusion – short-term savings goals are often more realistically reached.

3. People tend to focus on a specific number, such as A$400 (Australian Dollars) when they plan savings.  Research shows that it is better to think of a number ‘range’, say between A$350-450.

• Reasoning – to our brains, a ‘range’ between a lower and higher number feels more attainable.

Savings tips

In a recent article on Forbes.com, experts offered some effective tips on overcoming mental blocks to saving.  They include:

• Celebrating small savings goals met

• Automating monthly savings – arrange a direct debit from your monthly income

• Using a visual motivator – create a collage or mind map of your savings goals as a reminder that you are saving not to deprive yourself, but to reward yourself later.

• Using the “buddy system”: Just as you might enlist a friend to help you reach your fitness goals, you can ask a pal to act as a “savings buddy” who motivates you to reach your savings goals. 

Did you enjoy these saving tips? Worthy Women is available to purchase in paperback: http://lyfeacademy.com.au/ and also for kindle: http://ow.ly/XA8My