The problem is that while some of us are natural savers, others are more likely to spend everything we earn. Consumer psychologist Adam Ferrier says everyone’s attitude towards money is determined by psychological biases, with the most common being what behavioural economists refer to as “hyperbolic discounting”.
“That is the tendency to perceive what we receive today as more valuable than what we may receive in the future,” Ferrier explains. “So, given the choice, most people would rather take $50 today than $100 in a year’s time”.
“This makes saving for the future difficult. However, this effect is most prevalent in certain types of people – those who have difficulty delaying gratification. They are more likely to be spenders and enjoy the satisfaction of spending today, rather than the delayed gratification of saving for tomorrow” he says.
Can you train yourself to be a better saver?
The answer is yes. While it seems many of us are hardwired to prioritise immediate gratification versus future happiness, becoming a reformed spender and a better saver is definitely something that can be learned.
An effective way to combat your bias towards spending over saving is to employ a psychological trick, according to Ferrier. “Spend time in the future,” he says. “Try to paint as tangible a picture as possible of what the future looks like and how much money you’ll need.”
So, visualising your future to reconcile the “future you” and “current you” could be a worthwhile way to start transforming your spendthrift ways.
How do you get started?
Once you’ve made the decision to become a better saver, start by drawing up an honest budget to work out what it really costs you to live. To help with your budget and become a better saver, you can find helpful resources online such as the government’s Money Smart site or you may want to seek out the help of Chris, our in-house financial adviser, who can help ensure you’re taking all your expenses into account. Whether you prepare your budget yourself or with professional help, seeing your figures in writing is important.
Your living expenses are the non-negotiables: food, education, health, housing and loans, transport, utilities and financials (insurance payments and the like). To get an accurate picture of your living expenses, check bank statements, bills and receipts that go back a few months. And keep in mind those once a year expenses such as car registration or insurance. As a rule, if you’re in doubt about your living costs, it could be wise to overestimate expenses and underestimate income.
Once you deduct your living expenses from your income, you can divvy up the leftover amount between spending (on going out, clothing and your morning coffee) and saving.
It may be surprising to discover how much your actual living expenses add up to. It’s up to you to choose your savings path and it’s important to find the right balance with a budget that’s not so tight you won’t be able to stick to it. Like well-intentioned but extreme dieting or exercise regimes, an unrealistic savings plan won’t work for long. It’s a good idea to review your budget every 3 to 6 months to make sure it reflects your current income, spending and your savings goal. A financial adviser could be helpful in keeping your plans on track and knowing that your budget is suitable for your circumstances.
Divide your accounts
Separating your money into different bank accounts with different purposes can make managing your finances a whole lot easier. For example, you could have an everyday account for your living expenses into which your wages are deposited. You could set up a separate high interest savings account for your savings to go into via automated payments set up with your bank or ask your payroll department if they can send part of your money directly to your savings account. If you can ‘set and forget’ your payments, you will know that your savings are growing without having to transfer them every time you get paid.
A third account could be used as an emergency or rainy-day fund. With some money tucked away, you can be prepared for life’s little surprises and unexpected expenses like your car needing a major service or you need to buy a new washing machine.
If an annual holiday or Christmas expenses are a priority, you could also consider an additional ‘storage’ account to tuck a little extra away for those special occasions.
What do you have to give up to improve your savings?
It would seem that daily takeaway coffees are considered a basic human right for many Australians. If that’s a non-negotiable for you, then build your coffee costs into your budget.
Only you can decide what you can or can’t do without, but most of us can’t expect to save without making some little sacrifices along the way. With your “eye on the prize” of building a deposit, paying your home loan sooner or saving for your future, finding a workable trade-off between your current and future lifestyle could make a little sacrifice worthwhile.
Call us in the office on 02 9517 1818, or email firstname.lastname@example.org to discuss your options. Or, if you feel like dropping in at our office, we are now located at 557a King Street, Newtown NSW 2042. Be sure to share our blog on Facebook and let others join the conversation!