If you’re having difficulty meeting your savings goals, you’re hardly alone.
Surveys show the majority of Americans have fewer than $1,000 in their savings accounts. Many can’t scrape together $500 for an emergency without going into debt.
There are certainly many external factors that make it difficult to save effectively. Insufficient income or unexpected expenses can foil the financial plans of even the most disciplined person. Yet it’s also important to realize that many of the impediments we face in terms of saving are of our own making.
As human beings, we’re naturally predisposed to act, think and feel certain ways that don’t always align with our larger financial self-interests. Cognitive biases and psychological traps can inhibit our ability to save or plan effectively -- and we may not even be aware of their presence.
With that in mind, let’s take a closer look at how these factors influence us, and the information you need to help overcome them.
How “Nudge Theory” can help you defeat financial procrastination
Procrastination is a near-universal human trait that often becomes particularly pronounced in the face of a difficult, unpleasant or complex task. We also tend toward inertia when dealing with a longer-term task, even if it’s not especially difficult or unpleasant.
In a financial context, procrastination manifests itself most negatively in terms of retirement savings. Statistics show that fewer than half of Americans have any substantial retirement holdings -- a major looming problem given the demographic shift that’s occurring as the Baby Boom generation ages.
Psychologists, behavioral scientists, economists and academics have studied the problem of procrastination and have developed some ideas to overcome it. Nudge Theory, which was popularized in a best-selling book by Nobel-winning economist Richard Thaler and legal scholar Cass Sunstein, proposes to improve financial and health outcomes by giving people a subtle nudge that influences their choices in a positive action.
A trip to the supermarket illustrates Nudge Theory in action: Just consider how the items with the highest profit margin are stocked at eye level, or the impulse buys are positioned at the checkout.
A nudge (in a self-improvement context) gives us an almost imperceptible push into a direction that’s in our self-interest. Making the average person’s 401k account contributions default rather than opt-in is a type of nudge. Doing this, in fact, increases participation significantly, as it overcomes our natural tendency toward inertia.
Applying this in your daily financial life can help you save more efficiently and manage your budget effectively. You can set up automated payment on all your regular bills, and also explore making regular automated deposits to your savings or investment accounts.
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Defeating our tendency to privilege the present over the future
People have an innate tendency to privilege present wants and needs over what will be needed in the future -- and that’s one of the reasons why saving money for long-term needs is so difficult. Psychological studies have shown that we have a hard time identifying with our future selves; in many ways, it almost feels like a different person.
This creates a problem, because we’re also predisposed to value what’s in front of us over what may be in the future. Over the millennia, scarcity forced humans to feast in times of plenty to prepare for times of famine.
While it’s not easy to override centuries of conditioning, foregoing immediate gratification for the benefit of our future selves is foundational to saving and investing. When you’re tempted to put off making a larger retirement savings contribution - or even start saving at all -- it’s important to remember the consequences today’s actions will have on your future happiness and stability.
One of the best ways to put this thought into action is to start taking measurable steps toward realizing your long-term goal -- an idea that transitions perfectly into our next section.
The power of small wins in saving
Behavior, whether positive or self-defeating, tends to reinforce itself. Just consider how the first few days of a diet or an exercise regimen are always the most difficult. Yet once you get the ball rolling, it becomes easier.
This is largely because we feel better about ourselves as we undertake these projects, and the progress we see reinforces our belief that the sacrifice is worth it. It’s vitally important to break down your goals into smaller, manageable steps.
In terms of meeting your savings goals, setting and tracking small milestones often serves as the push we need to escape our tendency to procrastinate or rationalize. By making a few successful deposits into a savings account, negotiating a better rate on an existing loan, cutting unnecessary expenses or opening a new retirement account, we begin a chain of positive, self-reinforcing behavior. Ultimately, this helps create the habits we need to realize life’s financial goals.
Cognitive biases and natural human tendencies can be a serious roadblock in terms of achieving financial security. Yet by recognizing how they work -- and taking steps to mitigate their effects -- you can develop the ingrained habits necessary to get your savings on the right track.
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