The psychology of saving and how to get your brain on board

We all know certain behaviours are better for us, such as eating healthily, exercising regularly and saving money, but we don’t always do the right thing. If you feel like there’s an angel and a devil on your shoulders, you’re not far off! Read on to discover what’s really going on – and ways to work it to your bank account’s advantage.

Making decisions about money

Even when we’re motivated to change our behaviour by starting to save or increasing the amount we’re saving, there are often psychological barriers that create what’s called an intention versus action gap. These can be caused by the way we make decisions.

Professor Jonathan Haidt came up with the idea that within us all is an ‘elephant’ and a ‘rider’, who take turns calling the shots. The elephant is impulsive, instinctual and emotional, and likes shortcuts and habits. The rider is more calculated, rational and deliberate, and prefers planning.

We all like to think our rider’s in control and can point the way forward, but when the elephant disagrees, it takes over. Our rider has great intentions, but it’s the powerful elephant that has more influence on the action we take. Understanding this dynamic helps to explain why it’s hard for us to save or increase our savings, and offers solutions for getting to grips with it.

Commitment strategies for saving

Making the decision to save money involves processing a trade-off between spending now and saving for the future, and relates to a psychological concept called present bias. Present bias shows that people (well, their elephant) tend to prefer immediate, small rewards (instant gratification) to delayed, large rewards. Present bias can also make us procrastinate if we’ll experience a small loss (for example, not being able to eat out because we want to save money) before a larger reward (being able to afford to go on holiday). Our elephant dislikes loss, so we’ll find a more appealing immediate alternative instead (going out for that dinner tonight).

Impatience and impulsivity can be signs that you’re demonstrating a present bias. Interestingly, impulsivity mainly shows itself when we’re faced with a decision between now and the future, but if two options are both in the future, we tend to be more patient. Immediate choices pique the interest of the elephant, but if there aren’t any immediate choices, the rider has more control.

One way to avoid an impulsive elephant that prefers to spend rather than save is for your rider to set up a future commitment that doesn’t require action to start, such as payments to your savings account that start automatically on a specified date, or an increase in your KiwiSaver contribution rate that’ll start automatically on your next payday. This can kickstart your savings without drawing the attention of your elephant.

Developing self-control is another way to overcome present bias, and when it comes to saving goals, commitment strategies can enhance self-control, for example:

• Assigning deadlines to challenging saving goals.
• Restricting access to savings accounts until a goal amount or certain date is reached.
• Self-imposing a penalty that occurs after failing or deviating from a saving goal.
• Creating household saving rules.
• Asking someone to monitor your progress towards a saving goal.

Reach your financial goals

Setting goals can help us change our behaviour and bank balance, but some are better than others. This is because goals can be framed in a way that reduces the chance of a loss.

Framing is important because elephants hate losing. Being careful about your goal setting and where you place your focus can help avoid upsetting your elephant and keep your rider in the driver’s seat.

Some tips for financial goal setting include:

• Falling short of a goal can upset your elephant, so don’t be too ambitious. Instead, set goals to capture steady progress.
• Break large goals into smaller sub-goals, which aren’t as daunting.
• If we’re close to achieving a goal, our elephant’s desire to avoid a loss will give us a motivational boost, so use a tracking mechanism to capture your progress.
• If a goal’s too easy, motivation will decline quickly after we achieve it. To avoid this, set up another goal to maintain your momentum.

Sorted’s goal planner was created to help you set doable goals and stay on track.

The how and why of saving

We can change how we frame goals in a way that influences our motivation and how hard it feels. We can be specific or vague, and focus on the ‘why’ or the ‘how’.

• Specific saving goal: $1000 in six months.
• Vague saving goal: As much as possible in six months.
• ‘Why’ focus: I’m saving so I can visit my sister overseas.
• ‘How’ focus: I want to build up my savings, so I’m going to start catching the bus, rather than paying for parking.

Being specific increases how important a saving goal seems, and matching this with a ‘why’ focus helps maintain motivation. On the other hand, people who have a ‘how’ focus may become demotivated by a specific goal because it makes it seem harder to achieve. They’ll end up saving more when their goal is vague, because they can divert more energy to the act of saving and reduce the room for a sense of failure.

If you want to start saving for the first time, you may like to set a vague saving goal, so you can focus your attention on how you’re going to save. After some trial and error to figure out what works for you, you could get more specific with your goals and change to a why focus.

At the end of the day, you don’t want your rider to fight with your elephant, because the elephant will win every time. A successful rider learns what their elephant feels and likes about money, and tries to work with it. Setting saving goals isn’t about just satisfying the rider – the elephant needs to get treats too. It’s about finding the balance between spending and saving, and that takes time to figure out.

Taking Sorted’s money personality quiz and learning more about your preferences can help give insights into your elephant. It’s easier to guide an elephant where it already wants to go, rather than forcing it down a different path. A successful rider will get to their intended destination without their elephant even noticing.

Ben King is Sorted’s financial research specialist.