3 Psychological Tricks to Help You Save Money
We all know that saving is important and is something that we should be doing. And yet, overall we’re doing less and less of it. We know what we need to do. The question is: How do we do it?
Your savings behavior is not a question of how smart you are or how much willpower you have. The amount we save depends upon environmental cues around us. A study was done among two groups, first group was shown their income on monthly basis and another group on weekly basis. And it was found that people who saw their income on a weekly basis were able to budget better throughout month. There wasn’t any changed made by a research group on how much money people were receiving, researchers only changed the environment in which people understood their income. And environmental ques like such has an impact.
This article is not about what you already know about how to open a saving account or how to start saving for your retirement. It is about a knowing a gap that exist when we think of saving and how to bridge this gap from your intention to save and your actions. And that’s why you should have a glance through this article to understand and start saving money which you really want to do but have been making excuses.
The first way to start saving money is, harness the power of pre-commitment. Fundamentally, we think about ourselves in two different ways: our present self and out future self. In the future we’re perfect, we’re going to save for retirement, we’re going to lose weight and all the possible good thing that we might be doing. But we often times forget that our future self is exactly the same person as our present self. We know that one of the best time to save is when you get your tax return. Researchers tried an A /B test, where people of first group were texted one month before they filed for their taxes. And ask them, “If you get a tax refund, what percentage would you like to save?” This is a really hard question as they people were unknown whether they would receive a tax refund or how much. In the second group, people were asked right after they received their refund, “What percentage would you like to save?” Now here’s what happened. In that second condition, when people just received their tax refund, they wanted to save about 17 percent of their tax refund. But in the condition when people were asked beforehand they even filed their taxes, savings rate increased from 17 percent to 27 percent when asked before. Why? Because you are committing for your future self, and of course your future self can save 27 percent. These large changes in saving behavior came from the fact that we changed the decision-making environment if you are willing to change your saving behavior then harness the same power. So that a moment and think about the ways in which you can sign up your future self for something that you know today will be a little bit hard. Sign up for an app that lets you make savings decisions in advance. The trick is, you have to have that binding contract.
The second way saving money is, using transition moments to your advantages. An experiment was done with a website that helps older adults share their housing. Two ads were running on social media, targeted to same population of 58 years old. One ad said, “Hey, you are getting older. Are you ready for retirement? House sharing can help you.” Second ad was little more specific and said, “You are 58 and turning 59. Are you ready for retirement? House sharing can help.” The second ad was highlighting that transition is happening. All of a sudden, the sign up rates increased when age was highlighted. In psychology, it is called the “fresh start effect.” Whether it is a start of new year of even a new month your motivation to act increases. So right now, put a meeting request on your calendar for the day before your nest birthday. Identify one financial thing you most want to do. And commit yourself to it.
The third and the final trick to save money is get a handle on small, frequent purchases. Number of researches that are done over the years has found that number one purchase people say they regret is eating out. It’s a frequent purchase people make almost every day and its death by a thousand cuts. A coffee here, or pizza at new place around the corner, it adds up and decreases our ability to save. Though people know they are spending way too much but information alone doesn’t change behavior or a spending habit because environment around you is still the same. If you are eating all 3 meals of day outside cutoff at least 1 meal day and start eating at home. This will make huge change in your spending pattern and help to save money.
As human beings, we can be irrational when it comes to saving, spending and budgeting. But luckily, we know this is about ourselves and we can predict how we will act under certain environments. Let’s do that with saving. Let’s change our environment to help our future selves.
