The psychology of spending little money: the best tricks to save backed by science

Three months of expenses. That was the recommendation did the Bank of Spain in June 2022: save “three months of expenses”; that is, enough to “face the unforeseen day-to-day”. just take a look Spanish saving rates to realize that, finally, sounds like science fiction.

And yet, with galloping inflation and unprecedented social instability, it seems that now more than ever is the time to stop and think about how we can cut expenses and clean up our personal, family or business finances. What does (psychological) science say about all this?

The difficult task of balancing personal finances

as i explained our colleague Alejandro Nieto, “three months of expenses” is a reasonable figure, but not very specific. In these cases, the “canonical advice” is that of harold pollack: that our savings target should be between 10% for the lowest wages and 20% for the tall ones

This, let’s face it, is not easy. Between 2013 and 2019 the Spanish saved 6.9% of the income available (on average). That means, that an average saver took “three years and five months” to have those three months saved. It is true that in 2020, through a pandemic, that savings went up to 16%but in 2021 the percentages fell again (to around 11%) and inflation threatens to leave that percentage of savings at historic lows when 2022 ends.

And it’s not a surprise either. There is a huge set of biases that distort the view we have about our personal finances and “prevent” us from making decisions that (economically speaking) would make more sense than the ones we actually make.

Among all those biases, the bias of the present (the tendency to value more what ‘is’ in the near future than in the distant one) and loss aversion (the tendency to prefer avoiding monetary losses to achieving equivalent monetary gains) are, quite possibly, the ones that have the most direct impact on the financial decisions we make. Fortunately, science has a lot to say when it comes to helping us use those biases to our advantage and “give us a little push”.

A little push?

Lucas Van Oort

Let’s be direct: we are machines. Machines of flesh and bones and skin and nerves, but machines nonetheless. That’s what the ‘nudge theory‘, the push theory. It does not contain any great news, it is a framework that allows behavioral and cognitive psychology to be applied in our day to day: whether it is the design of public policies or, as in this case, achieving small personal objectives.

What’s more, if we had to summarize the main idea of ​​the ‘nudge theory’, it would suffice to repeat one of the basic consensuses of behavioral science: that when we talk about changing behaviors, the positive reinforcement and indirect suggestion they are more effective than prohibition and punishment. If we are chance and behavioral laws, why not take advantage of it?

The best known example of the potential of this theory has a lot to do with the UK pension system. Despite the fact that surveys and opinion studies said that workers were sensitized to the need (and desirability) of saving for retirement, the truth is that savings rates were tiny. And no matter what the government did, the rates still did not increase.

In this context, the British government’s Behavioral Insight Team (a special unit dedicated to this led by psychologist David Halpern) proposed an idea so simple that it seemed far-fetched. Halpern and his team proposed changing the default options on the form used to manage retirements. There were many skeptics, but the data spoke for itself: in three years, the proportion of workers increased from 55% to 83% in large companies.

The moral of this story (and many others) is that simple, clean, absurdly dumb changes… can lead to great results. And if the moral is that, the question is even simpler: in a situation like the current Can we use those principles to maximize our savings? Can we change our habits and behaviors to be more solid and resilient (financially speaking)?

Strategies to make better decisions and help us with savings

Today, in fact, we are going to focus on small changes that can help us make better decisions. The ways in which psychology can help us are much broader, but they may not be as quick to implement.

Have a (realistic) goal for the future and use it to our advantage

It is curious that sometimes things as simple as “project yourself into the future” (i.e. imagine ourselves in the long term) help us to make better decisions. In fact, the more vivid that projection is, the more it would impact behavior: the studies Those who have used these techniques for decisions such as buying automatic savings accounts, choosing long-term rewards, or taking exams seem pretty solid.

And it is that, in general, one of the most effective strategies to combat biases is “engage“Despite the cliché, people are not good at lying (or lying to ourselves) and we tend to escape from situations that force us to deny or act against the things we believe in. In the case of savings, each purchase decision is, in the bottom, an occasion of be consistent with our goals and objectives. Therefore, having made a commitment, having been explicit about it and examining (in the most transparent way possible) each relevant decision in light of said commitment is a great way of using “our conscience” in our favor.

To do this, however, our objectives must be concrete and realistic (although obviously not easy to reach). It is useless to commit ourselves to saving 20% ​​of our salary if, at the moment of truth, the essential expenses exceed 80% of it. If our savings goals are excessive (that is, they do not really depend on our marginal decisions), they will stop being useful to us quickly: as soon as we prove that they are impossible to achieve.

Instead, if we want to create a realistic goal to fully commit to, we will need to do household budgets, carefully analyze expenses and income and find out how far we can go. With that in mind, commitments and personal projections into the future become tools that improve our decision-making.

Make automatic saving and spending painful

Rupixen Com

The other great strategy is to save ourselves from that decision making. One of the central themes of retail is the reduction of what Loewenstein called ‘pain to pay’ (discomfort that causes us to spend money and that undermines customer satisfaction). The great race of the last few years has been to make the buying process so fast and clean that we are hardly aware that it is taking place. The “buy in one click” or the subscriptions go from that.

If you look closely, the previous section basically focuses on increasing that “purchasing pain” so that the decisions we make are as conservative as they can be financially. The other way is simply prevent us from having to make decisions that we do want to take: those related to saving. The best example is the savings automation. If instead of sending money from one account to another by hand, we automate it: we avoid having to assess each month if it is a “good time” to make that transfer. What’s more, we reverse the load: the decision we have to make is whether it’s a “good time” to withdraw money from the savings account.

Like this example there are dozens. From creating shopping lists that “defend” us from supermarket promotions or discounts (which tend to use our “loss aversion” so that we make expenses that we don’t really need) or using prepaid cards for things like entertainment ( that protect us from impulsive spending). as often repite our colleague Javier Lacortworth spend some time a think about how these types of tools can help us in our day to day.

Image | alexander gray