by Mae Saslaw

Painless Saving

Forming good habits is just as difficult as breaking bad ones, if not more so. As the late, great Mitch Hedberg once said, “People who smoke cigarettes say, ‘You don’t know how hard it is to quit smoking.’ Yes I do. It’s as hard as it is to start flossing.” If you think it’s hard to save money, this post is for you. At BankSimple, we understand how tough it is to get into the habit of setting money aside for your goals, especially when most banks encourage you to spend. In designing our new ways to help you save, we’ve done some research on behavioral economics and why many people have trouble saving.

Why Save?

First, let’s talk about the two main reasons you might want to save money. Some people set up funds for big purchases and life events, such as home buying, education, child care, home improvement, vacations, etc. It’s also a good idea to have money set aside in case of an emergency. Saving towards a goal tends to be a little easier, especially if you’re disciplined enough to keep your eyes on the prize and look forward to the long-term payoff. In any case, you know it’s really a much better idea to make regular deposits into your savings account than it is to spend your entire paycheck on things you don’t absolutely need. So why do you justify the unnecessary expenses, and why does saving seem so tough?

The Psychology of Saving

The answer is pretty obvious: Most people value instant gratification above long term benefits. Traditional economic theory tends to favor rationality and assume that financial change is predictable based on people’s long term interests. Behavioral economics attempts to account for irrational decisions, and to explain people’s decision making habits using psychology and cognitive science. Behavioral economist Hugh Schwartz finds similarities between spending habits and pleasure-seeking, and he argues that two different mentalities are involved in our judgement:

One “self” is said to dominate when it comes to the general case for evaluating the case for saving more—but another takes over when it actually comes to the moment of spending; similarly, one “self” is assumed to determine the case for consuming or abstaining from consuming drugs in the abstract, but another self takes over when the drugs are presented.

If you’ve ever ordered one too many drinks, you’ve met the “other self”. This other self is surprisingly good at rationalizing decisions you wouldn’t make under normal circumstances, and you let it take over because it’s way more fun. Freud called it the Id, and he taught us that civilized society is based around the ways we’ve learned to keep our Ids in check.

You’ll (Probably) Be Glad You Saved

Spending money when we could save it instead probably doesn’t harm us as much as any of the other, destructive behaviors our Ids may encourage. But the problem unfortunately goes deeper than a controllable and irreducible preference for instant gratification. Schwartz also notes:

Economists have long recognized that a given amount of future benefits is less valuable than the same amount that is available immediately. This is not only because existing assets have a potential for earning something in the periods ahead, but also because the benefits in times ahead may not materialize, indeed, that the asset might not even survive. (ibid.)

We’ve been sold on the slogan “You only live once,” and our selective historical memory argues that there’s no guarantee you’ll ever reap the benefits of your savings. But face it: You don’t really think the world is going to end next year, right? Next time your Id suggests that you blow your paycheck on a night out because you could get hit by a bus tomorrow, try answering with reason and a little basic optimism.

A Better Way to Save

The myopic self is much better at mind games than the part of your consciousness that’s good at math and listening to economic reason. BankSimple is designed with this in mind, and we prefer to help you save. Using our Goals feature, you can tell us how much you want to save and what you are saving for, and we’ll automate transfers towards that Goal. We do the math for you and transfer funds automatically. Your savings are safely stowed before your Id has a chance to interfere.

Disclaimer: Hey! Welcome to our disclaimer. Here’s what you need to know to safely consume this blog post: Any outbound links in this post will take you away from, to external sites in the wilds of the internet; neither Simple or our partner bank, BBVA USA, endorse any linked-to websites; and we didn’t pay/barter with/bribe anyone to appear in this post. And as much as we wish we could control the cost of things, any prices in this article are just estimates. Actual prices are up to retailers, manufacturers, and other people who’ve been granted magical powers over digits and dollar signs.