A survey by the American Psychological Association showed that 72% of Americans get stressed out at least once a month about money or savings issues.
Yes, there are external factors that prevent people from saving: low income, job loss, war. But there are also patterns that are hidden in our minds and habits. The American behavioural economist Richard Thaler even won the Nobel Prize for his work on people’s saving habits. Thaler’s work is based on the theory that we usually tend to make irrational decisions that get in the way of saving wisely.
Here’s how to rewire your brain and learn to save money.
4 reasons why most people can’t save
Low earnings
It’s impossible to create a safety cushion or set aside money if your earnings barely cover your essential expenses. When you live from paycheck to paycheck, you may not always have enough to live on, let alone save for the future.
Impulse purchases
You see something and put it in your basket without thinking. It may seem like an irrational decision, but the part of your brain associated with pleasure (the septum) ‘lights up’ when you make a purchase.
By the way, the same part of your brain is activated under the influence of alcohol or other substances. Over time, our brain cells get used to it and demand more stimulation. This need encourages you to spend more, even if it contradicts your plan to save money. It’s similar to the temptation of online gambling promotions, like Stay Casino no deposit bonus codes, which offer instant rewards. While they might seem like a great deal, they can lead you into spending more than you originally planned.
The reward for saving does not come instantly
When you spend money, you get a quick surge of dopamine – which, however, passes just as quickly. But if you save some money, you don’t feel happy right away. It’s a delayed gratification that doesn’t reward the brain spoilt by cheap fuelling.
We save (or don’t save) just like our parents
Each of us carries a set of ‘money scripts’ shaped by our childhood experiences and the communities we live in. And when faced with a financial decision, these memories shape our behaviour.
For example, you may have grown up in a family where:
- Saving was rare (your parents, grandparents, aunts and uncles lived from paycheck to paycheck)
- Spending was easy (you learned to shop online before you could read)
- Spending money was a reward (when you got good grades, you were bought a bike)
When you’re faced with monthly budgeting, all of these habits and memories influence your decisions.
How to rewire your brain and learn to save money
The good news is that healthy habits can literally reboot your brain thanks to neuroplasticity. When you form different patterns of behaviour, your brain creates new connections and cognitive pathways, making these external habits part of your personality.
#1: Define your financial goals and values
In the psychology of saving money, you need clear plans to stay motivated. If you define your financial goals and values, it will help you stick to your savings pattern.
For example, you might have the following personal values:
- Financial freedom
- Long-term financial stability
- Saving for retirement, maternity leave or a downshifting year in Bali
These values can lead to the formation of financial goals:
- Pay off debts/loans
- Create a safety cushion
- Save for a major purchase (house, car, etc.)
Aligning your spending habits with your personal values means giving up everything that won’t help you achieve your goal. For example, if dining out makes it difficult to pay off your debts, you’ll have to take food to work from home. But at the same time, if you spend 3 hours at the stove instead of writing an article for your favourite editor, food delivery wins in the long run.
#2. Automate your savings
Back in 2006, a group of scientists from Yale, Harvard, and the University of Chicago proved that people who set up automatic money transfers to a savings account/deposit were able to not only save more, but also develop healthy financial habits.
And a study by researchers at Case Western Reserve University (USA) showed that the virtual ‘muscles’ of willpower can get tired. When this happens, we spend more and indulge in irrational purchases. Thus, financial automation will help you make more responsible decisions and reduce the risk of spontaneous spending due to willpower fatigue.
Most banking apps allow you to set up automatic deposits and transfers. Every month, this feature will transfer money from your checking account to your savings account. This allows you to build savings without thinking about it.
You can also set up a separate account for rounding up expenses. Each time you pay for something, for example, 430 dollars, the amount will be rounded up to a hundred, and 70 dollars will go to a conditional piggy bank.
#3. Visualise
A visual reminder of your financial goals prevents you from falling back into old habits and helps you focus on what matters most to you.
For example, you can create a wish list with images of your financial goals on it, and the constant reminder will even unconsciously influence you.
For those who are more inclined to signs and docks, you can create a savings roadmap. Print out the plan on a large sheet of paper and mark successful milestones in colour to see how far you’ve come.
#4. Fight impulse purchases
People often buy things spontaneously because they feel anxious or inferior without them.
One way to stop spending money thoughtlessly is to switch to cash. Scientists from the Massachusetts Institute of Technology have discovered an interesting pattern. When you pay with a card, your brain’s reward system is activated more easily than when you pay with cash, which is harder to let go of. The use of credit cards triggers a greater ‘urge to buy’ in the future.
Also:
- Set a clear budget before going to the store
- Don’t go shopping on an empty stomach
- Record your expenses and analyse them at the end of the month in any way you like – from the simplest expense items in Excel to automated applications
#5. Harness the power of delayed gratification
Delayed gratification is the resistance to the habit of getting cheap dopamine. According to psychologists, this skill is one of the most important features of highly successful people.
Where to start?
- Challenge yourself to see how long you can resist temptation
- Avoid online stores that tempt you to buy something
- Create a wish list, but only make purchases when you have enough money saved for them
Maybe you’ve been wanting a new phone, but you’re not sure if now is the right time. Make it a short-term goal, but wait to make the purchase until Black Friday or the start of a new financial month, for example. This way, you’ll achieve a specific goal while postponing your satisfaction until you’re financially ready.
#6. Create a supportive environment
Your environment forms the ecosystem in which your habits will be created and thrive. People with similar goals will not pull you back into old patterns.
Ideally, friends and family can form a strong support network. But if your loved ones don’t share your goals, you can join an online community or find an accountability partner. For example, agree with a colleague that you will keep track of expenses in parallel and discuss the results at the end of the month.
Reddit has a personal finance section where you can take part in challenges to earn or save money, or just find support.
#7. Don’t let advertising influence you uncontrollably
As soon as the thought pops into your head that your life will be better as soon as you buy a new gadget, it’s all downhill from there.
To avoid this:
- Don’t read magazines or blogs that promote luxury or fashion items
- Limit your time on platforms with a lot of advertising: from TV to social media
- Develop habits that will bring you healthy dopamine. The same regular sport or practice of delayed gratification will become an eco-friendly and possibly more economical supplier of joy.
#8. Keep yourself motivated with rewards
The psychology of saving money requires you to stop, feel the progress and praise yourself for it. In fact, celebrating even a small success will remind you of your goals.
When you reward yourself for sticking to a new habit, your brain begins to associate it with something positive. Therefore, when you reach your savings goal, it’s worth adding a little incentive to it – for example, your favourite dessert.
#9. Keep track of your finances
Economists from the University of California, Los Angeles, Shlomo Benarzi and Yaron Levy from USC have discovered an interesting fact. People who downloaded an app for tracking expenses reduced them by 16% after 4 months of use, mainly due to the costs of everyday life.
#10. Spend less than you earn
If every penny that comes into your account is spent on purchases, you will have nothing to save.
Take time to plan your budget. To get started, write down:
- Recurring expenses (keep track of rent, utilities, planned car payments, and other monthly expenses)
- Planned, but not recurring expenses (birthday gifts, holiday shopping, and other similar expenses should also be included in your budget in advance)
Keep track of how much you have to spend each month and make sure you don’t spend more than you earn.
