Why saving is so difficult and how can technology make it easier
It’s almost the end of the month and..how can the account balance be already so low? Once in a while we all experience the feeling that things are not as we planned them. It seems to be a common feature of many long-term plans: they just don’t come naturally. Recent studies try to explain why saving is so difficult for our brains. Financial companies can benefit from these insights, using technology to help us reduce the friction to adopt healthier behaviours.
It’s hard. But it’s hard for everyone
First of all being disciplined about savings is hard for everyone, everywhere. Whereas it is commonly said that we should save between 15% and 20% of our income, our behaviour is still very far from it. In the last decade, the propension to save in Europe has been between 9% and 13%. In other parts of the world, the percentage of income that people save is even lower: around 3% in the US, 11% in Australia and 0,7% in Japan.
Overall, this shows that a healthy financial behaviour is hard when it comes to saving money. The difference between what we should rationally do and what we actually do has been explained by science.
Giving money to a stranger: our future self
It’s not a surprise: in the fight between our present self and our future self it’s usually the former to be better off. This factor complicates many long-term decisions that have an impact on our health or benefit in the future when they entail a sacrifice in the present. Think of starting a diet, going to the gym and, of course, start saving.
Hal Hershfield, a social psychologist at UCLA Anderson, found there’s a scientific reason that explains why this happens. His studies show that when we think of our future self, our brain responses in the same way it does when we think about someone we don’t know. As a consequence, we often fail to make good choices for the future because we feel emotionally disconnected from it.
When we think about ourselves and when we think about other people, we perceive feelings in a different way. According to Emily Pronin, a psychologist at Princeton University, we experience our own thoughts and emotions internally, whereas, for other people, we only know what their thoughts or emotions might be.
These two studies explain why saving is so difficult. It’s because we feel like taking away money from our present self in order to give it to a stranger: our future self.
Successful saving: focus on the tree rather than the forest
Science shows that saving doesn’t come as a natural habit for human beings. So what we can do is to try to trick our brain to reduce the friction we associate with saving money for the future.
There is an infinity of great guides and checklists that have methods to save better, more, faster. It seems there’s one particular thing that really seems to work to help us save: start identifying our saving goals. To be successful with savings we should focus on the tree rather than the forest.
As we discussed, saving is difficult because it’s hard for our brain to visualise our future selves in a concrete way. Hence, to identify our goals has two main effects. Firstly, giving a name to what we’re saving for means we make it concrete. When our saving target doesn’t stay vague and indeterminate, it’s easier to visualise it as something we can experience. Secondly, it keeps us motivated. Reminding our present selves why we’re saving makes it easier for our brains to imagine how our benefit would be when we achieve the goal.
Make saving a routine and reward ourselves for it is the first step to transform it into a habit and hence be successful.
Fintech and behaviour: a new world of possibilities
The interest for how our behaviour influences our financial decisions can foster a great wave of innovation in the financial industry. Many companies, from traditional institutions to fintech, start to realise that the behaviour of each one of us is different from what rationality would suggest.
Understanding why this happens is the key to plan a better financial future for each one of us. For example, when we started Bittiq, the very first thing we did was to talk to more than 300 families. They helped us understanding their relation with finance and why certain choices are harder than others.
Nowadays, many companies, such as Chime or Betterment in the US or Dreams in Sweden, successfully apply good knowledge about customers to automated savings or investing. With Bittiq we believe that technology should be applied to help each one of us make better financial decisions.
For many years the financial world has been closed to the theories of behavioural economics. The wrong belief that our choices are all rational created too much detachment between what we should do and what we actually do. Understanding why saving is so difficult and how we can be more successful will help reduce the gap between our expected and our actual behaviour. The challenge of the financial industry for the next years is to use technology to build products that help people the way they are and not the way they should be. The result will be to add real value to our lives.