Let’s be honest: Saving money is hard. And Canadians, by and large, aren’t very good at it. In 2017, the national savings rate for an average Canadian household hovered around 4 per cent.
Whether you’re trying to increase the amount you’re putting aside or trying to replenish money you’ve already borrowed from your savings, it can feel like an uphill battle. This is because our brains have a really hard time making rational decisions – especially when it comes to money. Despite having the best intentions, behavioural science has shown that we are naturally prone to favour the wants of today over the needs of tomorrow. To our present-minded brains, saving money is viewed as a net loss.
While it may help for some of us to reframe the act of saving – e.g., you’re not cheating your present self, you are sharing with your future self – many more of us benefit from more subtle tactics. In fact, what we really need are some ways to trick our brains into acting more rationally. For those who want to increase their short- and long-term savings but just can’t seem to ever get ahead, here are a few tried and tested tricks, backed by behavioural science, that can help make saving as easy as spending.
1. Make it automatic
Set up a regular automated transfer to a savings account. Time it to your pay schedule when you’re less likely to miss the money.
Why it works: An automated transfer counteracts one of the cognitive biases that stops us from moving money to our savings, while exploiting the power of another. One reason we struggle to save is the temporary feeling of loss or pain that comes whenever we part with our money. By timing the money to move on or near your payday, it’s possible to minimize what psychologists call the “pain of paying.” But by making it automatic, you are also leveraging the power of human laziness – that is, our status quo bias. It will take more work to stop the transfer than it will to simply live with it. Once the hard work of setting the transfer is done, the same inertia that made it hard to save will make it hard to stop.
2. Give your account a name
When you give your money a name – “my vacation,” “my emergency fund” or “my retirement” – it becomes harder to use it for something else. Some banks allow you to create and name sub-accounts. But a workaround is easy: Just open a new savings account and give it a nickname.
Why this works: It’s a classic saving trick based on a cognitive bias known as mental accounting. We have a tendency to put our money in separate mental buckets based on irrational factors, including our intentions for that money. Once funds have been earmarked as being for something, our mental accounting kicks in and we’re less likely to touch those funds for anything else. However, there is a potential drawback: For the same reason the money feels spoken for, it can be easy to forget it can also be used for other purposes in a pinch. Your vacation goal might be important, but likely not as important as paying off high-interest credit card debt.
3. Think small (now think smaller)
When you are thinking about how much you can afford to transfer to your savings, it’s easier to think weekly than monthly. Maybe even daily. You are more likely to commit to a plan of saving a few dollars a day than several hundred dollars a month.
Why this works: Research suggests we are less sensitive to the fact we might lose some money today, when it is framed as a smaller amount. A field study by scientists at the University of California, Los Angeles, showed that four times as many people were willing to sign up for a plan to save $5 a day than a plan to save $150 a month. But if you need convincing this trick works, you’ve seen it before. It’s commonly used in sales tactics that reframe car-lease payments to seem more affordable: Just $90 a week as opposed to $400 a month. No sales person was ever in a hurry to point out it adds up to $24,000 over the life of a five-year lease.
4. Convert your payment habits into savings habits
Any time you eliminate a payment from your life – say you pay off a loan, or move the kids out of daycare – keep up the habit, but move the money to your savings before you get used to the extra cash.
Why this works: There has been a lot of research in psychology that shows routines are powerful drivers of our behaviours. When we can find an existing habit, and we can leverage it to drive a new behaviour, the new routine is more likely to stick. From a scientific perspective, it is really is as easy as maintaining what you were already doing, just adjusting the outcome. Even if there aren’t any upcoming changes in your budget, you can review services or subscriptions you no longer need or enjoy. Ask yourself: Would I rather pay $100 a month for cable or transfer that money to my vacation fund?
These are some simple tricks that anyone can employ to make saving as easy as spending. They work because they either counter or exploit our brains’ most irrational impulses. It is true that saving is hard, but with a little bit of planning ahead, you may find that saving is easier than you think. Or better yet, doesn’t require thinking at all.
Tinuke Oluyomi Daniel is a behavioural scientist at Evree, a Toronto-based startup that builds an app that makes saving as easy as spending.