The Psychology Behind Saving Money
By Anne Ueberbach
Assistant Director / Counsellor
The Psychology Behind Saving Money
We all have heard of saving strategies like the 1/3 rule (which recommends splitting your available funds 1/3 for housing (rent/mortgage), 1/3 for savings, and 1/3 for anything else to help us budget and save money efficiently. We are also aware of the risks of over drafting our debit cards or accumulating credit card debt. But why is it so difficult to start and maintain saving?
Much of the difficulty that lies with saving money stems from overcoming psychological obstacles to saving. Many people have complicated relationships with money, and money often is the number one source of stress, conflict, and divorce in relationships as well as marriage.
Potential Impacts of Financial Strain
-Reduced relationship satisfaction (e.g. different financial goals, different spending habits, discrepancies in salaries)
-Negative impact on mental health (e.g. depression, anxiety, chronic stress, etc)
-Negative impact on physical health due to long periods of stress (e.g. high blood pressure)
-Poor work performance
-Strained friendships and relationships to relatives
Common Barriers to Saving
-Unsure how or where to start
-Struggle with staying disciplines (impulse shopping, peer pressure, etc)
-Fresh out of university and yet to start first job
-Barely making ends meet due to additional commitments (e.g. caring for elderly parents, childcare, school fees, etc.)
-Unforeseen circumstances interfering with saving goals (e.g. broken household appliances, water leak, etc.)
-Internal rationalisation/ unhelpful thinking styles
I want to save, but…
… “There is always something I need.”
… “I Want to Live in the Moment.”
… “I’ll Start Saving Later.”
… “I don’t earn enough.”
… “The cost of living is too high.”
Despite being aware of these common barriers to saving, as well as the psychological and physical downsides of not saving, we are still struggling to create and maintain a healthy saving routine. But why? Most of these issues come down to something called temporal discounting.
Temporal Discounting & Instant Gratification
Temporal discounting refers to a behavioral tendency to discount rewards as they become more distant in the future. Many of us would rather choose 100$ today than 200$ next year, because the farther away the reward is, the less valuable it appears. Our brain is wired to prefer instant gratification / instant gains, over delayed gratification / delayed gains. This applies not only to money related gains, but any area across our life – think dieting, exercising, etc.
For many of us, spending money is a way to feel good instantly – e.g. by purchasing a new phone, new outfit, or eating a special meal we’ve been eyeing for a while. However, overspending or spending beyond our means, and potentially accruing debt, will most likely not make us feel great in the long-run. If we believe that spending makes us happy, we are almost destined to be miserable. The instant gratification and satisfaction of a new phone or outfit is often short-lived, as we become used to the new item and no longer feel that “high”, leading us to making another purchase soon after.
Instead of falling into this trap, we want to change the way we think of saving. Saving can be just as satisfying as spending if we focus on the right parts – such as feeling satisfied and proud of seeing our savings grow month by month.
2 Steps to Efficient Saving
In order to save money, we need to follow two steps:
Step 1 - Establish a compelling reason to save, which serves as a motivator
Reasons to save can be anything from short-term goals such as wanting to buy a new car to long-term goals of purchasing a house, setting up a university fund or getting on top of our retirement fund. Whatever the goal you choose, make sure it is
something you actually want to achieve. It is very difficult to stay motivated when
working towards a goal that is not ours, does not fit with our values, or does not excite us.
Step 2 - Create a realistic, achievable plan
In order to create a compelling reason to save, we need to create a clear, realistic and achievable goal. If my goal is to become a millionaire in 5 years time through saving, but I am only to save 2000$/year, then I am only setting myself up for failure.
Other General Savings Tips
Leverage on “anticipatory happiness” as you save for your future expenditure. With each dollar you save you can feel excited about your future purchase.
Consulting with your significant other about financial goals and expenses.
Pay a little attention to your finances every day so you can intervene early if needed.
Utilize spreadsheets / apps to help keep track of your expenses and savings.
Incorporate rewards to prevent frugal fatigue.
Be vocal about your savings goals. If you tell close friends and family how much you intend to save and by what date, they’ll hold you accountable.
Consider growing your savings with a savings account or long-term deposit account that offer high interest return rates.
Automate savings so that your income automatically goes into your designated savings account.
Celebrate wins, no matter how small or insignificant they may feel.
Re-evaluate your savings plan regularly and adjust if needed to meet your current needs.
How Can Counselling and Therapy Help?
Although counsellors, psychologists and psychotherapists are not finance experts, they are mental health experts, making them a great resource when it comes to helping us identify our true savings goals and managing our motivation and behavioural habits while working towards them.
Book an appointment with our team of counsellors, psychologists and psychotherapists today!
DISCLAIMER
This article was not written by a finance expert and does not disregard the knowledge and services offered by financial experts. For personalised financial advise, it is recommended for you to reach out to a financial advisor or accountant.