By: Jalil Mills, MBA
Let's talk about money - the dangling carrot on the stick of life's financial treadmill. It's like a mind game we're all enrolled in, where the rules are made up and the points don't matter... well, until they do. Saving money becomes less about the math and more about mastering the art of mental gymnastics. We're all just one impulse buy away from financial peace or financial ruin. So, today let's dive into the world of saving habits.
In the world of saving, the stakes are high and our wallets are at stake. Understanding the psychology of saving is like trying to decipher the secret language of thriftiness. Why do we save? Why do we splurge? Are we programmed to hoard pennies every day or toss them away? Every decision is a fork in the road between monetary responsibility and financial failure.
In this blog post, we will unravel the mysteries of saving. From the psychology of impulse buying to the art of budgeting, no financial stone shall be left unturned. Together, we will equip ourselves with valuable insights to empower better financial choices. No matter your attitudes toward money, using the following tips will strengthen your "saving muscles" and help you build sustainable wealth over time.
The Power of the Money Mindset
Understanding the role of mindset in financial behavior is crucial for managing finances. Mindset refers to the beliefs, attitudes and assumptions that a person holds about money. Your mindset significantly influences your financial decisions and behaviors. Research has shown that individuals with a growth mindset, who believe in the potential for improvement, tend to form better financial behaviors, such as saving regularly, investing wisely, and managing debt effectively (Liu, Qiang, and Tong, Yuqiong).
Developing a sound financial mindset can be tricky. Money scripts are deeply ingrained beliefs about money that shape people’s attitudes towards it. Common money scripts include beliefs such as “money is the root of all evil, “mo’ money, mo’ problems,” or “I will never have enough money to save.” These beliefs are often developed in childhood and can have a profound impact on saving habits. For example, someone who believes that money is scarce may hoard it or avoid spending even when necessary, while someone who believes money equals happiness may overspend to achieve a dopamine rush.
Let’s take three people faced with the same financial situation. Imagine Person A, Person B, and Person C all receive a $3,000 bonus from working extra hard at their job. Person A has a scarcity mindset and may immediately spend the money on luxury items or trips, viewing it as a rare opportunity to indulge in the finer things. On the other hand, Person B has an abundance mindset and may choose to invest the money or save it in a high-yield savings account, believing that their money can work for them and grow over time. Meanwhile, Person C has a fear-based mindset and chooses to shy away from spending and investing altogether, rather, they let the money sit in their checking account.
This simple example paints the picture of how mindset plays a significant role in how individuals approach their money. Now let’s flip the script and imagine the same three people during a financial setback. After taking their vehicle to a mechanic, they discover that there is $3,000 worth of repairs needed to fix the problem. Person A, with a scarcity mindset, panics and decides to put the cost of repairs on a high-interest credit card. Person B, driven by an abundance mindset, decides to negotiate with the mechanic or consult outside mechanics for a cheaper repair option. Person C, armed with a fear-based mentality, decides not to heed the mechanic’s advice and continues to drive the vehicle without repair.
In these two scenarios, it’s important to note how having differing money mindsets lead to different reactions. It’s also important to note that each person believes that they made the best decision for the situation. And this is especially true in real life. People may not even realize the negative consequences that their financial decisions cause. In the example of the $3,000 bonus, Person A bases their happiness on enjoying luxurious, material items. Whereas, Person C feels that luxury items are a waste of money, therefore, they are happy knowing that they still have the $3,000 sitting in their bank account. Person A thrives from retail therapy and Person C thrives from frugality. It’s difficult to say which decision is right. The key message here is recognizing your current financial state and making decisions based on that.
Uncovering Psychological Barriers to Saving
While navigating life, there seems to be one universal consensus for everyone, regardless of tax bracket. And that is the question, “How can I save more money?” Referring back to the section on money mindset, our personal beliefs and backgrounds play an enormous role in how we approach saving money.
One of the main barriers to saving is the feeling of fear. Fear can manifest in ways such as fear of scarcity, fear of the unknown, and fear of losing money. The fear of scarcity often results from a belief that there will never be enough money available to save for personal financial goals or leisure activities. The fear of the unknown often involves spending money now, just in case an unforeseen event happens in the future that leads to money loss. This can coincide with the fear of money loss or sudden job loss. These fears can lead to individuals developing short-term thinking, prioritizing immediate gratification rather than long-term financial security.
When beginning to save, impulse spending can be a serious threat. The feeling of instant gratification can often tempt individuals to splurge on purchases, derailing their savings goals in the process. As humans, buying an item and holding it in your hand may feel better than saving that money and letting it grow in a high-yield savings account. We can thank consumer culture for that one. The allure of instant gratification seems to trump the power of compound interest.
On that same note, procrastination stands strong as a formidable barrier to saving. Due to lack of a perceived emergency, a person may postpone taking action towards their financial goals. This tendency to delay savings often stems from several factors, including overconfidence in future income, a belief that there will always be time to start saving later, or even sudden emergencies that threaten your wallet. A 2014 study concluded that those who predict that their future will be optimistic may save less money (Wong). This may seem counterintuitive but the same study also found that those who predict their future to remain the same are more encouraged to save. These are common examples of cognitive biases that we face while trying to save more money.
Consider the fictional story of James, who struggles to save for retirement due to fear of missing on present-day experiences. Despite earning a comfortable salary, James finds himself living paycheck to paycheck, constantly falling victim to the allure of luxury items, vacations, and going out with friends. Similarly, Vanessa finds herself trapped in a cycle of procrastination, putting off saving for emergencies or retirement year after year, convinced that she will have plenty of time to catch up later. These examples highlight the influence of psychological barriers on saving behavior.
Practical Tips for Overcoming Psychological Barriers
Confronting fear is often the first step towards overcoming psychological barriers to saving. By addressing the fears related to money, individuals can take proactive steps to regain control over their finances. This may involve identifying the types of fears discussed in the previous section: fear of scarcity, fear of financial failure, and fear of the unknown. It’s also important to explore their underlying causes.
Setting realistic goals and creating a financial plan can help alleviate the anxiety. Breaking down larger goals into manageable steps can make them feel less overwhelming, empowering individuals to take control of their financial life. For this step, I recommend using a budgeting app such as Nerd Wallet or EveryDollar to track your monthly expenses. Doing this will show exactly how much money is left after all expenses are paid. This is where your discipline matters the most. Choose to allocate a portion to debt and savings and another portion to free spending, depending on your specific goals. Anticipating a trip in the near future? Allocate more of the remaining funds to savings. If you feel threatened by high-interest debt, allocate a larger portion towards debt payments.
"Budget" doesn't have to be a forbidden word. Nor does it mean that you are financially defeated. Using a budget simply means that you are telling your money where to go. |
Seeking support from friends, family and credible financial sources can provide valuable guidance and encouragement during challenging times. These resources can help people navigate their fears and build confidence in financial decision-making.
Curbing impulse spending is another important aspect of overcoming psychological barriers to saving. A monthly budget helps with carefully tracking expenses in order to gain insight into your spending patterns and finding areas to adjust. Establish clear spending limits and prioritize needs over wants. Doing this can reduce the temptation to make impulsive purchases.
It is helpful to implement a waiting period for making non-essential purchases. For example, if you spot an item on Amazon, wait 48-72 hours and reassess your desire for the product. |
You can also find alternative ways to satisfy emotional needs without “retail therapy.” Try engaging in hobbies that bring joy without breaking the bank such as hiking, picnics, museum visits, etc.
Overcoming procrastination is often a huge challenge when striving to save money. Again, it is extremely useful to break down savings goals into smaller, manageable tasks. An annual savings goal of $5,000 seems a lot more daunting than saving $416 per month.
Setting deadlines and accountability efforts, such as sharing progress with a trusted friend, can help you stay on track and hold yourself accountable. Utilizing automation tools and reminders, such as automatic transfers to a savings account or calendar alerts for debt payments, can help you gain consistent saving habits by reducing the need for manual adjustments.
Understanding the Influence of Emotions
Another example of an emotional barrier to saving is the presence of present bias. Present bias occurs when a person places more emphasis on rewards they can have now, and places less value on receiving the same reward in the future.
Furthermore, loss aversion bias is another cognitive response that can impact attitudes toward saving. With loss aversion bias, an individual places greater emotion to losing something rather than gaining the same thing. For example, a person may suffer more from losing $50 than gaining $50. This form of bias can be tied to having a fear-based money mindset. This person will prefer to prevent losses rather than thinking of future gain (Paragon Bank).
We must also discuss the role of emotional triggers in impulsive spending and overspending. These triggers shed light on the relationship between our emotions and financial behaviors. Emotional triggers are often deeply rotted in our psychological makeup, stemming from experiences, beliefs and even societal influences. They can range from stress and anxiety to feelings of inadequacy or the desire for instant gratification. When faced with these emotions, individuals may turn to spending as a coping mechanism, seeking temporary relief or a sense of control over their circumstances.
The first step is to identify these emotional triggers. By recognizing the emotions that drive our financial behaviors, we can develop strategies to address them more effectively. This may involve practicing mindfulness techniques such as deep breathing exercises, meditation, exercise, and daily journaling. Seeking professional support from a therapist can provide valuable tools for managing emotions in healthy ways.
Once emotional triggers are identified, it’s essential to implement your preferred strategies for making rational financial decisions. One approach is to create a cooling-off period before making any big purchases, allowing time for emotions to subside and rational thinking to prevail. As mentioned previously, this could involve waiting a specific period of time before making a purchase or talking with a trusted friend for advice. Another practical tip involves creating clear financial goals. The motivation to save can often be stifled if there are no goals to work towards. It is also vital to drink plenty of water, get enough sleep, and prioritize activities that bring joy. Once you decide to embark on the journey to save, your entire life does not have to revolve around finances.
Cultivating a Healthy Money Mindset
Now that we’ve discussed ways to overcome psychological and emotional barriers, it’s time to embrace a positive mindset towards money. By adopting a mindset that views money as a tool for creating opportunities, you gain a sense of freedom and empowerment over your financial life.
Reframing negative attitudes about saving is a crucial step in developing a healthy money mindset. Many people have limiting beliefs about saving. Don’t get me wrong: life can get really hard at times. That’s okay! It is also perfectly fine to press pause on your savings efforts to recoup from major life events.
Beliefs such as “saving money is too difficult” or “I’ll never be able to save enough” can most definitely be challenged. Replace “I’ll never be able to save enough” with “I am capable of saving money each month, even if it’s just a little bit.” Replace “Saving money is too difficult” with “With a solid plan, I can accomplish any savings goal.” Doing this simple mindset reversal can instill confidence and motivation to take proactive steps towards saving. Notice how I said “steps” and not “leaps.” You don’t need to make drastic changes at first, start off slow and make incremental increases as you gain more confidence with saving.
Practicing gratitude and mindfulness can also play a role in creating a healthy money mindset. Gratitude involves appreciating one’s life, including financial resources. By focusing on what you have rather than what you lack, you can develop a sense of satisfaction with your financial situation. Mindfulness, on the other hand, involves being present and aware of one’s thoughts, feelings, and behaviors related to money. By practicing mindfulness, you can become more conscious of your spending habits, make more intentional financial decisions, and avoid impulsive purchases driven by emotions.
Conclusion
We have explored various aspects of understanding and overcoming psychological barriers to saving, offering practical tips for creating a healthier relationship with money. We also discussed the role of emotional triggers in impulse spending and overspending. Also, we delved into the significance of reframing negative beliefs and attitudes about saving, as well as practicing gratitude and mindfulness.
Throughout this blog post, we reinforced the idea that understanding the psychology of saving is important for achieving financial goals. By recognizing the emotional and cognitive factors that influence our decisions, we can learn to burst through any barriers that stand in our way.
As we conclude, it’s crucial to apply the insights and strategies shared in this post to improve saving habits and overall financial well-being. By adding these tips into daily life, you can take proactive steps to building a more secure future. Whether it’s setting realistic goals, creating a budget, practicing gratitude, or seeking support from professionals or loves ones, every action taken towards managing your saving is a step in the right direction.
Disclaimer: The information provided in this blog post is for educational purposes only and should not be considered financial advice. Consult with a financial professional for personalized guidance.
Sources
Liu, Qiang, and Tong, Yuqiong. “Employee Growth Mindset and Innovative Behavior: The Roles of Employee Strengths Use and Strengths-Based Leadership.” National Library of Medicine: National Center for Biotechnology Information, www.ncbi.nlm.nih.gov/pmc/articles/PMC9252464/.
Paragon Bank. “Five Tips to Overcome Cognitive Biases and Become a Better Saver.” Cognitive Biases That Stop You Saving Money | Paragon Bank, www.paragonbank.co.uk/blog/five-tips-to-overcome-cognitive-biases-and-become-a-better-saver#:~:text=We%20dive%20deep%20into%20two,bias%20and%20loss%20aversion%20bias.
Wong, Kristin. “When It Comes to Money, Your Brain Can Be Your Own Worst Enemy.” The New York Times, The New York Times, 26 Feb. 2023, www.nytimes.com/2023/02/26/business/personal-finance-cognitive-bias-retirement.html#:~:text=A%202014%20study%20suggested%20that,%2C%E2%80%9D%20their%20savings%20rates%20increased.