Mind hacks and the psychology of saving

Why are Americans so bad at saving money? And why are some people so good at it?

The Atlantic has a nifty video that talks about why Americans don’t save very much. Of course for those struggling to get by, saving is a luxury. But most of us could save if we were so inclined, and people in other countries generally save more than Americans. Why?

The Atlantic postulates that income inequality may be the culprit. Media, and now social media, saturation shows us a skewed sense of the world. We aren’t comparing with our neighbors, we’re comparing to the Kardashians. This is why reading Financial Independence blogs and being part of in-person meet ups with other FI folks can be so motivating. Instead of comparing to poor people who lease cars and spend on credit, you’re comparing with other like-minded savers. Be intentional with your tribe.

Changing Your Mind About Money

Psychology also has much to do with it — spending money today is more fulfilling than saving. That hasn’t been my experience, and I can’t imagine it’s the experience of most people following financial independence. I get extreme satisfaction watching my accounts rise or calculating a positive cash flow in tools like Personal Capital. I’m not sure why this is, and if this is something innate or something I acquired — all I know is it’s helpful.

But what if you’re not one of those who is a natural saver? Can you change?

Make it automatic

Our psychology can be a hinderance to saving, but it can also be a boon. Must of the key to wealth building is making saving automatic. Opting in automatically for retirement and other savings vehicles is the quickest path to wealth. Pay yourself first before you start spending by setting up automatic transfers from your checking to brokerage or savings accounts. Then you’re not using your limited will-power muscles to save. It’s just happening. Trick yourself into this by knowing you can always get that money back if you need it, or even just want to buy something.

Goals and long-term thinking

The next trick is setting a concrete goal. Most people need motivation to overcome the immediate buzz of buying. “Saving for retirement” is not a goal if you don’t have concrete data: a date for retirement, an understanding of how much you will have and what you could do with it. This is one reason I’m so passionate about using tools like IORP or OnTrajectory to understand your numbers. Then the tradeoffs actually have meaning.

Quart has a great article on the power of long-term thinking, inspired by the venerable The Millionaire Next Door:

Think your daily $5 Frappuccino is harmless? Well if you drink it five days a week, that’s $25/week. Which means you’re stealing $18,800 from your future self and giving it all to Starbucks! So from now on, you won’t think about savings or expenses just in terms of this week or this month, but in terms of the next 10 years.

If Financial Independence seems to far away, trick your mind by dividing your goals into sub-goals. For instance, when I was saving for a down-payment I was extremely motivated to pile up cash and would just not spend on anything apart from basic needs. Once the house was bought, I would set a somewhat arbitrary number of savings “just in case” and monitor progress toward that nice, round number. That’s not as sophisticated as fully understanding your FI number, but it’s motivating.

Celebrate your wins

Setting smaller goals and celebrating wins is extremely important to keep you on the path to financial freedom. That could be some of the following milestones:

  • Becoming debt free except your mortgage
  • Saving 15% of your income
  • Saving $10,000 in a savings account (etc)
  • Making your first investment outside of retirement
  • Hitting a savings percentage goal for the month
  • Achieving round numbers in your net worth path ($100k, $1m etc)

The most important step is basking in your progress. Celebrate every one of these — or even smaller steps — intentionally and thoroughly. A celebration could be a treat like buying something or doing something for yourself like going on a special hike. It doesn’t really matter as long as you celebrate and bask in the positive emotions of a job well done. That will give you a boost to keep going.

The neuroscientist and mindfulness teacher Rick Hanson has an amazing book on hardwiring your mind for happiness.  His advice which I think is extremely key to becoming a natural saver:

When you’re aware of a good fact – either something that currently exists or has happened in the past – let yourself feel good about it.

So often in life a good thing happens – flowers are blooming, someone is nice, a goal’s been attained – and you know it, but you don’t feel it.

This time, let the good fact affect you, stay with it for ten, twenty, even thirty seconds in a row, and then sense that this experience is sinking into you.

So next time you practice something positive around money, let yourself feel it. Bask in it, and notice what happens over time. You will change your pre-disposition and your behavior.

About Satisfied Ghost

I’m the Chief Ghost at Satisfied Ghost, a blog tackling financial independence mindfully.

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