We’ve all met somebody brilliant at managing their money and somebody equally disastrous at keeping on top of their personal finances. Butwhat separates the savvy saver from the debt-saddled frivolous spender? And howcan a person struggling with their personal finances really transform theirpsychological approach to saving money?
These questions are all the more important when you consider the importance of healthy finances for our mental health. A survey by the American Psychological Association, for example, found that some 72 percent of Americans felt stressed about money at least once in the prior month.
Thankfully, there is now ample research to begin answering these questions. Behavioural economics and psychological research offers some interesting advice on how we can use the workings of our brains to foster a savings mind-set.
Automating Your Finances
Thefrugal living blogging community extolls the benefits of automating yoursavings and investments – and with good reason. In short, the automation ofpersonal finances is about setting up automatic transfers and payments intosavings accounts, investments and financial commitments periodically.
Theapproach isn’t fool proof, but it strips away the opportunity to spend the moneymoved on impulse and instead tucks it away for the future. And with automatictransfers and payments, your money is allocated where it is needed as soon asit arrives, without having to grapple with difficult spending decisions. Inother words, your money is on ‘autopilot’, making it a lot easier to make theresponsible choices with your money.
Notonly should this reduce stress levels and time devoted to managing your money,but evidence from psychological studies suggests you will actually save greateramounts over the long term.
Nava Ashraf, Dean Karlan and Wesley Yin published research in the Quarterly Journal of Economics in 2006, for example, which demonstrated that automating transfers to accounts with time or total value criteria created lasting changes in savings approaches.
What’s more, research from Roy Baumeister and his colleagues at Case Western Reserve University showed that our willpower muscles can get tired. And while our willpower is most run down we are more likely to overspend and make less responsible financial decisions. The role of automation of our finances – to make more responsible decisions with our money on autopilot – can therefore mitigate the risk posed by willpower fatigue.
Tracking Your Finances
As well as offering a range of other benefits, setting up a proper system for tracking your personal finances can also act as an impetus for psychological change. Checking balances regularly, understanding your net worth and holding yourself accountable based on those figures can foster significant financial benefits.
This isn’t just anecdotal. A study by Shlomo Benartzi and Yaron Levi found that participants using a mobile app to track spending and investment performance reduced their spending by nearly 16 percent. Similar research by the Federal Reserve in 2016 found that 62 percent of mobile banking users checked their account balance before making a large purchase in the 12 months prior to the survey, and half of them decided not to purchase an item as a result of their account balance or credit limit.
Soit’s clear that increased awareness of our personal finances drives behaviouralchange in our spending and investing patterns. And with the new technologies atour disposal, driving that awareness of our personal finances and creating apositive habit of tracking our money is now easier than ever before.
Goal Setting and Small Wins
Automatingand tracking your personal finances are evidentially great ways to create apositive savings mind-set, but they’re not a silver bullet. Our saving habitscan fall away as our motivation wanes. Forming and achieving specific goals cantherefore play a crucial role in sustaining motivation and engraining newhabits.
Charles Duhigg explains this brilliantly in his book, The Power of Habit. In short, he outlines that how we form positive – and negative – habits depends on a habit loop that we all adopt unthinkingly in our neurological make-up. These habits are fortified by associative rewards and can only be formed through the adoption of particular behaviour patterns.
Ofcourse, in order to form these new behaviour patterns there must be someunderlying motivation to behave. And that’s where goal setting comes in. Theachievement of goals has been shown to have a positive impact on savingsmotivation so can act to maintain a savings mind-set. Ourbrains produce higher levels of dopamine upon achieving our short-term goals,which acts to reinforce new behavioural patterns.
But don’t set over-reaching goals or overdo the number of savings goals. Research from Dilip Soman and Min Zhao published in the Journal of Marketing Research suggests a single well-defined savings goal fosters higher ‘implementation intention’ than multiple savings goals – in other words, providing a more powerful spur for actually saving money.
My tip: Celebratesuccess, but keep your eye on the prize
All this automating, tracking and goal setting can still take its toll. The words budgeting, pension planning or cost cutting are not exactly bright sparks of motivation. Indeed, the reality is that they tend to bring associative ideas of deprivation, sacrifice and even unhappiness to the surface.
So how can we reinforce positive ideas to go with this journey towards shifting our mindsets?
Thebig rewards for saving and investing are often deferred for the long term, soas you achieve short-term wins it’s worth celebrating your successes toreinforce the change journey further. As already mentioned, there is ampleresearch out there on the benefits of short-term wins for habit formation, butthe occasional reward above and beyond just achieving your short-term goals canmake the journey all the more enjoyable.
Whynot treat yourself to a meal out for hitting your saving target for the month?Or buy that jacket you’ve had your eye on for a while? So long as your treat isreasonably priced, it’s not going to set you back dramatically on your journey.In fact, it may just reinforce your new found savings habits.
And a possible bonusfrom flexing those willpower muscles…
Whilewe make changes to the way we think about money, we’re flexing our willpowermuscles in new ways. Our newfound awareness of our net worth is challenging ourprevious levels of impulsivity. We are starting to say no to unnecessary costsand yes to frugality. And research suggests that this savings mind-set mayyield more results than just the financial ones.
Back in 2006, Megan Oaten and Ken Cheng published some interesting research on willpower. They asked participants in a study to undertake a money management programme, which involved similar exercises such as tracking and automating their finances, and setting goals and targets.
Unsurprisingly,their personal finance situations improved. But incredibly, the researchersfound that participants were also smoking fewer cigarettes, drinking lessalcohol and caffeine, and eating less junk food. What’s more, the participantswere found to be more productive at work or university. As Charles Duhigg putsit, “once willpower became stronger, it touched everything.”
Sothere you have it: automate and track your money, set goals and celebrateshort-term wins. And who knows, you may just lose weight and work moreproductively while you’re at it.
