Have you ever had that sinking feeling when you glance at your bank balance towards month-end and find it alarmingly low? Or a credit card statement reflecting a higher total than anticipated? Do these scenarios ring a bell?
While we often use humour to mask the disappointment and unease these situations spark, deep down, they’re no laughing matter. Paying bills, putting away some savings, and still nurturing dreams of accomplishing bigger goals are serious issues that many people grapple with.
There are real reasons why the account doesn’t close. After all, for a significant percentage of the population, essential expenses are greater than income.
Still, many people who admit they can save at least a little each month need help organising themselves. So… What happens? Why are so many people willing to keep but so few managing to plan for it?
Science can explain – and help reverse this situation.
What Does Science Say About Our Financial Habits?
Does the phrase, “I had every intention of saving, but I just couldn’t resist spending!” ring a bell? Before you consider this behaviour poor financial knowledge, take a closer look. Your inability to save is deeply rooted in your psychology.
A study by the American Psychological Association suggests good saving habits revolve around our capacity to envision ourselves in the future rather than our understanding of personal finance.
For most of us, living in the moment is far more intuitive, often without considering the long-term implications. Interestingly, this perception can be influenced by a range of factors, including the language we speak.
Behavioural economist Keith Chen claims that individuals who speak languages that use the same verb tenses for present and future – such as Chinese and German – are likely to save more. Why is this, you ask? They tend to view both the now and future equally, owing to how their languages encode time.
On the other hand, saving might pose a greater challenge if your language distinguishes between present and future verb forms – like Portuguese does. This is because there’s a subconscious disconnect between the present and the future, often leading to an undervaluation of the outlook.
The battle against saving money arises from our inherent tendency to prioritise our present needs over future stability. It’s the constant mental tussle between immediate gratification and potential rewards down the road.
Now, you might ask, “So, does being a German speaker translate into a superior savings habit while Portuguese speakers are fated to struggle with financial planning?” Not necessarily. Language, while influential, is just a piece of the larger puzzle of how we perceive and plan for our futures.
Why is It so Difficult to Think About the Future – And, Consequently, Save Money?
Quick, answer this: are you now the same as you in the future? Most would instinctively respond with ‘yes’. After all, we presume that our core identity remains constant despite life’s various twists and turns. However, our brain begs to differ.
An intriguing study by American psychologist Hal Ersner-Hershfield proposes that when we visualise ourselves in the future, our brain treats this future self as an entirely different person.
Confused? Allow me to explain.
Brain scans reveal fascinating patterns. A specific brain area lights up when someone thinks about their present self. However, when they contemplate their future self, this same area goes dormant. The brain behaves like it’s mulling over a stranger, not its owner.
Our brain perceives our future self as an unknown individual, making it difficult for us to establish a deep connection or properly strategise for this ‘stranger’s’ long-term financial health.
And Now? How to Hack our Brain?
Fear not; we can harness the power of science to enhance our ability to save money.
In his insightful book “The Psychology of Money”, acclaimed behavioural economist Dan Ariely provides valuable advice on curbing expenditure and augmenting our savings. That is grounded in the established understanding of our financial behaviours.
1- Think about the opportunity cost
When you make a choice, you are invariably giving up something else. In economic sciences, this is called “opportunity cost”: a concept that can help with personal finances.
When purchasing, we rarely think about what we are giving up. If a person buys a cell phone, for example, they are spending money that could be invested in travel.
So, before buying anything, ask yourself: “What am I giving up to make this purchase?” If it is something important, it may be better to rethink this expense.
2- Focus on the amount that will be paid
You know when you see a product with 50% off and rush to buy it because “you can’t miss this promotion”? Please don’t fall for it.
Our mind is drawn to what we save, but we should focus on how much we spend.
Buying a Ksh 15.000 item impulsively because it was priced originally at Ksh 17.000, for example, is not saving Ksh 2.000: it is spending Ksh 15.000.
The next time you see a discount, think about how much it will come out of your pocket – not how much you are saving.
3- See money as… money
Research shows that, depending on the source of money, we deal with it more rationally or emotionally.
When it comes to your salary, for example, it’s natural to spend it on household bills and other fixed expenses that seem more serious.
On the other hand, the amount that comes in different ways, such as a gift or a bonus, tends to be spent on more “fun” things – clothes, parties and restaurants, for example – and emotional, causing the money to run out faster.
To get away from this, see money as money. Ever. It doesn’t matter if it’s salary, a bonus or a value given as a gift.
4- Make Saving Automatic
If saving money doesn’t come naturally, a great strategy is to automate this habit – literally. Use automatic transfers to your savings account. That reduces the need for continuous decision-making and can help you stick to your savings goal.
Think of a monthly amount that you can save and automate this process. Your future self will thank you!
5- Place Restrictions on Your Money
It’s common for restaurants to highlight an expensive dish on their menus. It is a suggestion of the best they offer. Still, it’s a way of “deceiving” the customer that all the other options are a bargain compared to that.
Reading it like this seems obvious, but it’s not – and we end up paying a price much higher than it’s worth.
According to Dan Ariely’s book, this happens because we tend to spend more when we don’t know how much we’re buying is worth – in the case of a restaurant, for example, the only basis for comparison is the dishes themselves.
One way to get around this is to place restrictions on yourself. When eating out, one option is to set the maximum amount you can spend. To buy a product, research how much it is worth and don’t allow yourself to pay more.
Oh, this also goes for those routine expenses we incur without even questioning – like cell phone bills and streaming service subscriptions. Look at these purchases and see if they are worth the price – or if you can save money here or there.
Remember: when choosing one thing, you are giving up another, so choose wisely!
Get informed on how to do more with your money.
