Why is it so hard to save money, even when we know we should? Why do some people seem naturally frugal while others spend impulsively? The answers are nothing to do with how much money we do or don’t have, it’s to do with our brains. Understanding the psychology behind saving and the behaviour that influences your financial decision making can help you to become more intentional with their money. We’ve outlined the key considerations below to show why understanding the psychology of saving matters.
Saving vs. Spending
At the heart of saving lies a constant conflict. That is the desire for immediate gratification vs. the discipline of delayed rewards. This is a classic case of behavioural economics at work. Our brains are wired to prioritise the present. We overvalue immediate rewards and undervalue future benefits. It’s an instinct that is evolutionary rather than irrational but one that can impact against us in today’s world.
Emotions & Finances
Money is deeply emotional. Fear, anxiety, pride, guilt, and even shame can influence financial behaviour. Recently we have seen this in relation to the “heart over head” emotional response from investors to current market volatility. This type of emotional undercurrent makes rational financial decisions difficult. It’s why people often know what they “should” do with money but fail to follow through.
Categorising Your Money
People categorise money in different, often irrational ways. This is often referred to as “mental accounting”, a term coined by Nobel laureate Richard Thaler. An example of this is treating a tax refund as “free money” and spending it frivolously or overusing credit cards in order to save into a low-interest rate product. Taking a holistic approach to your financial planning can help alleviate this type of behaviour.
Behaviour To Improve Savings Habits
Despite our make-up, there are strategies that can help people save more effectively. A simple thing like automating your contributions can remove the need to have to repeat the savings decision-making process. Goal visualisation, like in other aspects of our lives, can make what you’re saving for (e.g., a home, retirement, travel) feel more real and achievable. Breaking savings goals into smaller bit size targets can also help as hitting milestones sooner creates a better sense of achievement.
Next Steps
If you’re ready to start your savings journey, why not get in touch with one of our financial services team. We’re here not just to help you select the right product but also to help you build better financial habits. Whether you’re a new saver or a seasoned investor, through regular reviews we’ll help you stay on track to achieve your goals.
