Why is saving so difficult?

Saving regularly is an uphill battle. We must do it. We should do it. So why do we struggle to do it?

Behavioural scientist Dan Ariely tries to explain this with an analogy. Imagine a bicycle you really want that costs $1,000. You can visualize your life with the bicycle, but it’s much harder to visualize what will happen to your life if you do not spend this $1,000.

Ariely explains that the challenge is that what we see, imagine and feel is spending, whereas saving is more abstract, non-emotional and far away. Therefore, we don’t care as much about it and we aren’t as motivated. As humans, we don’t do well with anything that has to do with now vs. later. This is why we overeat and under exercise and don’t save enough.

We know on one level that this behaviour will not serve our long-term best interests. But that is not compelling enough. Samantha Lamas, Behavioral Researcher at Morningstar, gives us three practical ways to tackle this.

Leverage the power of a good habit.

Our mind constantly uses mental shortcuts to make decisions, some of which come from our habits. Many of us don’t even notice our own habits because they’ve become something we do automatically. These simple habits make our lives easier by helping us reduce the hundreds of decisions we make daily. For example, brush your teeth every morning. Instead of waking up each morning and pondering whether to brush our teeth, our habit makes the decision for us. Another is to hit the gym every Monday, Wednesday and Friday at 6:30am. So instead of debating every morning whether to go to the gym or at what time, the schedule is set. These habits help us make fewer decisions and lead to better outcomes, in this case dental hygiene and health.

Similarly, developing the right financial habits may help make decisions easier and improve our overall financial well-being.

Introduce/Reduce friction when it comes to financial habits.

If you think self-control is all you need, you are setting yourself up for failure. Focus on reducing friction when building a habit. For example, if you’re trying to stick to a budget, make sure to transfer a fixed amount into a recurring deposit on the day your salary is credited. You can’t spend what you don’t have! To make it even easier, use technology to automate the process. Set up an automatic transfer on your bank app to automatically transfer the money. A systematic investment plan into an equity fund works on the same principle.

This tactic also gives us a dependable cue to save our money because we know that as soon as we get our paycheck, we should dedicate some of it to saving. When we are trying to build a financial habit, finding a cue is very important. A cue acts as a reminder to act out our rule and must be something dependable and memorable, like a specific day (every Monday, I must do X), the start of the month, or whenever you receive your paycheck.

If it is a bad habit you need to dump, do the reverse: make it inconvenient. If you’re trying to cut out sugar in your diet, your first step might be to throw out the cookies and chocolate and gulab jamun mixes from your kitchen. Follow this same idea when it comes to building financial habits. Delete shopping apps off your phone. Do the same with Swiggy and Zomato if ordering in is your weakness. Cancel magazine subscriptions you don’t use anymore. Leave your credit card at home when going out.

Reward yourself periodically.

If you want to stay the course, ensure you practice this. The reward can be something simple and inexpensive--like splurging on a fancy coffee drink.

A friend combined all the above when she realised that a huge chunk of her monthly expense was on eating out. She told her children that they would stop it going forward. To reward themselves, every single Friday night they would order in, and every Saturday, they would bake together or experiment with a new dish. So from ordering in around thrice a week, it dropped to just once a week (Friday), and a fun activity on a fixed day (Saturday).

Once you identify a behaviour and seek to correct it, compensate with something that makes you happy so as to encourage you to persevere.

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