The psychology of saving habits

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At first glance, increasing your savings may seem as simple as just clicking a button in a bank’s app. And we recently documented that emergency savings are an important lifeline for households to persevere despite a financial shock. Even so, saving money is one area where many people struggle.

Researchers often look at socio-demographic variables, such as age or income, to make predictions about people’s saving habits. But the decision to save, of course, goes beyond basic demographics – our unique psychological profiles spearhead the decisions we make, including decisions about our finances. What does behavioral science teach us about our savings problem and how can we overcome it?

This is what a group of psychologists decided to explore a few years ago, when they studied which psychological variables contribute the most to household savings in a sample of UK households. Researchers Patrick Gerhard, Joe Gladstone, and Arvid Hoffmann compared some of the most widely used psychological predictors of savings (self-control, financial goals, and financial literacy, for example). This specific study looked at savings in the context of an immediately available “rain fund”, rather than longer-term savings that are more difficult to liquidate, such as retirement savings.

One of the key aspects of this study is that the authors classified the participants as “trying” or “established” based on a statistical analysis of demographic information. Established households tended to be older (typically over 45, with people 65 and over most likely to belong to this group) and higher income. Conversely, households in difficulty were younger and in low income. The authors then regressed a household’s total emergency saving on the set of psychological predictors, separately for the two types of household groups, and found that these characteristics did not affect the saving habits of the household. everyone the same way.

Here are some important lessons we can learn from this research.

1) Younger households may be more unable than unwilling to save.

We may have heard many times about the benefits of self-control in saving. Indeed, it takes willpower to save money that we could otherwise spend. Interestingly, self-control did not play a role in the savings habits of struggling households. This result suggests that young households are not averse to saving; they just aren’t able to save money yet. When resources are present, however, the benefits of self-control have a greater impact: a one-unit increase in self-control has been associated with a 16% increase in savings among established households.

2) Goals focused on financial gains are useful, especially for “efforts”.

A goal can be considered “promotional” if it aims to make money, such as buying a new home. Established households and households in difficulty benefit from holding promotional savings targets, although the benefit has been particularly important for households in difficulty. Specifically, adding a single promotional goal was associated with an almost 99% increase in emergency savings. This figure was around 20% for established households.

3) Prevention goals can also help if you are younger.

Prevention goals aim to avoid losses, such as maintaining emergency savings for unforeseen expenses. This study found that adding a single prevention-focused savings goal (which includes the goal of building a rainy day fund) was associated with a 127% increase in savings among households in difficulty. Conversely, this orientation towards objectives penalizes the savings of established households; it was associated with a 15% decrease in the savings of these households.

4) Optimism can be counterproductive for saving habits.

Optimism has a lot psychological benefits. But it can also drain our savings, especially when we are younger. Each unit increase in the study’s self-reported measure of optimism was associated with a decrease in savings of 57% for troubled households and 16% for established households. Optimistic people may not expect the worst in the future and therefore are less likely to save for such an uncertain occasion. This does not mean that being pessimistic is advantageous (neuroticism was not related to saving). On the contrary, it is important to find the right balance between optimism and realism in the face of the unpredictable future.

Lessons Learned About Building Good Saving Habits

This research has made it possible to identify some interesting avenues on the psychology of household savings. Here are some lessons we can learn from these findings.

1) Identify where you are in the timeline of your life.

Are you “struggling” or “established? This can be an important question for individual investors and advisers to consider when writing a financial plan. As this study showed, strategies that might help one group may not help the other. Self-control is a prime example of this gap, as it benefited older households but did not play a role in the saving habits of younger households.

2) Prevent losses accordingly.

Young households in difficulty still face many uncertainties in life. As this study has shown, setting prevention goals can be particularly beneficial for these households by helping them develop strong savings habits. Indeed, these households can go into debt to pay for more important expenses, such as a car. Therefore, setting prevention goals can help stay the course to pay off debt on time while saving money.

3) Promote promotional objectives.

Unlike prevention goals, promotional goals have been beneficial for both types of households. This is because many promotion goals involve some sort of ideal outcome for the saver, like that dream home or maybe a promising stock. Because it is easier for us to visualize the tangible result of the goal, there is an extra effort to put a few dollars aside.

4) Be realistic.

Optimism is a healthy trait, but in some cases it can serve as a blindfold. In a perfect world, we would see no volatility and get consistent gains from our investments. But since such a utopia only exists in works of fiction, it’s important for investors to balance a sense of optimism with the reality of the haphazard volatility the future can bring.


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