It’s called the “$100 Bill Challenge.” Mac Gardner, a financial literacy advocate, shows elementary school students a $100 bill and asks them how they might use it. Nine students out of ten say they would spend it. This says a lot about the psychology of saving money — Gardner says that Americans “are programmed to consume at an early age.”
Maybe that’s why it’s so difficult to cut back on those gourmet coffees on the way to work. But that’s also why it’s so difficult to build your bank balance and develop a long-term savings plan.
Fortunately, the more you understand the psychology of saving money, the easier it will be to develop sound financial habits. As you discover more about your own money mindset, you’ll also learn that there are proven ways to change.
The Behavioral Science Behind Saving
Your saving and spending habits are governed by a small constellation of behavioral biases. And like most biases, these unconscious assumptions influence your behavior outside of your own awareness. Here’s just a sampling of what science has to say about your financial fitness.
Mental accounting refers to the way you might classify your funds differently based on subjective criteria.
So for example, you might start a savings fund to pay for a future car. Sounds great, right? But meanwhile, you’re sitting on a mountain of credit card debt and making only a little more than the minimum payment each month.
As far as the psychology of saving money is concerned, you’re spinning your wheels. Your brain is telling you that saving is important, but you’d actually be able to save even more if you ditched your car fund for a while and focused on paying down your high-interest credit card bills.
Fear can also play a major role in human behavior. Loss aversion refers to the way that consumers avoid decisions that lead to financial losses.
How does that apply to savings? It’s simple. The more money you put in your savings account, the less money you’ll have to spend each month. Loss aversion tells you to avoid saving so you have more money to work with.
Basically, loss aversion is the scientific name for financial FOMO — the fear of missing out. Your unconscious worry about losing out on a spending opportunity could very well be short-circuiting your spending strategy.
Understanding Your Money Mindset
As painful as it sounds, training your brain to save may require some self-examination. You need to understand your personal money mindset to clarify your financial goals, then identify behaviors and attitudes that could prove to be barriers to those goals.
Identify Your Financial Goals and Values
In the psychology of saving money, you need clear goals in order to stay motivated. If you identify financial goals and values, it can help you stick to your savings plan.
For instance, you might have personal values such as:
- Financial freedom
- Long-term financial stability
- Building wealth for your future
These values might translate into financial goals such as:
- Paying off debt
- Starting an emergency fund
- Saving for retirement
- Making a major purchase (house, car, etc.)
Aligning your spending habits with your personal values means saying no to anything that doesn’t help you achieve your goals. For example, if frequent take-out meals hold you back from paying off debt, it’s time to make an adjustment.
Examine Your Money Beliefs and Attitudes
You may also hold certain beliefs about money. Some see money as a symbol of personal status — this view may prompt you to spend more on designer brands or luxury goods.
Alternatively, you may see money as something of a reward. Once you pay your major bills, you might overindulge by treating yourself to an online purchase or an expensive meal.
Think back to the $100 Bill Challenge. What would you have done with that money? Your answer says a lot about what you believe about money, and it may also explain your personal financial habits.
Rewiring Your Brain for Saving
There’s good news. Healthy habits can literally rewire your brain, thanks to the science of neuroplasticity. When you build new habits, your brain creates new connections and cognitive pathways, making these external habits a new part of your identity.
You can learn to rewire your brain in two ways.
Automate Your Savings
First, you can simply automate your savings. Most mobile banking apps allow you to set up automatic deposits and transfers with ease. Every month, the automated feature will transfer money from your checking account and deposit it into a savings account.
This allows you to build savings without having to think about it. Alternatively, you could use a third-party financial management app to help you keep track.
Create a Visual Representation of Your Goals
You’ve heard the phrase “out of sight, out of mind,” right? The reverse is also true. A visual reminder of your financial goals can prevent you from slipping back into old, unhealthy habits and help you stay focused on what’s most important to you.
Some banking/financial apps can create some type of graph or timeline to help you track your progress. But don’t be afraid to get creative. If you’re saving for a house, for example, put a photograph of your dream home on the refrigerator or on your phone’s wallpaper.
And as an added bonus, the anticipation of your future can be good for your mental health.
Overcoming Psychological Barriers
Despite your best intentions, you may find yourself guilty of the occasional self-sabotage. For example, you might engage in spending habits that don’t align with your financial priorities or prevent you from saving the way you’d planned. Here’s how to overcome psychological resistance so you can stay focused on your goals.
Tackle Impulse Spending
How often do you purchase things you hadn’t planned on buying? People often buy things impulsively because they feel anxious or incomplete without them. But your shopping habits also play a major part.
Scientists from MIT have discovered that when you are shopping with a credit card, your brain’s reward system is activated more directly than when shopping with cash. Using credit cards leads to more “purchase cravings” in the future.
Willpower alone isn’t always enough to curb impulse spending. You can break a bad habit by:
- Setting a clear budget before you enter a store
- Not shopping for food when you’re hungry
- Deleting your saved credit card numbers from e-commerce websites
- Seeking accountability (such as from your family) for major purchases
Don’t forget that marketing gurus earn a living by making you feel incomplete. Don’t get sucked into the message that you need a particular item. In fact, you’ll be better off if you stay focused on saving.
Harness the Power of Delayed Gratification
Impulse shopping is all about satisfying your purchase craving. But delayed gratification means resisting this urge, either by choosing to wait until later to make a purchase or by reconsidering the decision altogether.
According to psychologists, delayed gratification is one of the most important traits of highly successful people. By delaying your purchasing decisions, you’ll prevent yourself from burning through cash that could otherwise be put toward savings.
Start by introducing yourself to a few new habits:
- Challenge yourself to see how long you can go without giving in to temptation
- Avoid looking at websites or stores that tempt you to make purchases
- Discuss major purchases with family and friends
- Create a wishlist and make purchases when you have enough savings
Maybe you’ve been wanting to upgrade your phone but you’re not sure if it’s the right time. Make this a short-term goal, but wait to make the purchase until you receive your tax refund. You’ve addressed a specific goal but delayed your gratification until you were financially ready.
Surrounding Yourself with Positive Influences
Your external world forms the ecosystem in which your habits will flourish. But the quality of those habits depends on the environment you surround yourself with. Here’s how to cultivate better habits with positive influences.
Seek Support from Like-Minded Individuals
In order to have a healthy psychology of saving money, you need a supportive social circle. It will reinforce your commitment to better financial health. And a strong social circle will also refrain from pressuring you to revert to bad habits such as impulse spending or ordering out for every meal.
Ideally, your friends and family can form a powerful support network. But if all else fails, you can join an online community or find an accountability partner through a financial or professional website. The social site Reddit has a personal finance section, and NPR likewise offers a Facebook support group called Your Money and Your Life.
Limit Exposure to Materialistic Influences
Don’t let marketing wizards cast the “if only” spell on you. This spell says that your life would be complete if only you purchased the latest gadget. Or that you would be seen as stylish and important if only you owned the latest brands.
To avoid the “if only” spell, stay away from materialistic influences by:
- Avoiding magazines or online blogs that promote luxury items or fashion
- Limiting exposure to social media where advertisers lurk
- Ignoring television advertisements
- Gaining satisfaction from healthy hobbies
Anyone can be vulnerable to the “if only” spell, but limiting our exposure to these influences can protect us from feelings of inadequacy or the need to feel complete through consumption.
The Role of Rewards and Celebrations
Part of the psychology of saving money requires that you stop and smell the roses. In fact, celebrating your progress can remind you of your goals and may also provide some release from the delayed gratification you’ve been trying to practice.
Incorporate Small Rewards for Saving Milestones
When you reward yourself for sticking with a new habit, your brain begins to associate that habit with something positive. So when you achieve a savings milestone, giving yourself a small reward can help you retrain your brain.
What kind of reward is appropriate? Consider things like:
- Dinner out at your favorite restaurant
- A stay-at-home movie night
- Indulging in your favorite dessert
- Treating yourself to a (small) purchase you’ve been delaying
Include your friends and family. A social celebration can be even more meaningful, and it can release additional endorphins that make the reward even sweeter.
Celebrate Progress and Financial Victories
What kinds of achievements might you celebrate? Here are some possibilities:
- Saving your first $10,000
- Paying off a credit card balance
- Paying off your student loans (or even by 50%)
While you shouldn’t go overboard, any victory can be worth celebrating, and even a small reward can keep you moving forward.
Stay the Course
Saving can be a challenge, but by curbing your spending and saving more money, you can develop habits that will help you for the rest of your life. If you apply the tips listed above, you may be surprised at how easily you’re able to meet your financial goals.
After all, it’s never too early — or too late — to think about retirement. Due offers a convenient way to fund your retirement years through an annuity plan. Contact Due today to learn how to save for your future.