In fact, recent statistics show that the savings rate in the United States is currently far below average. Why do so many people struggle to put money in the bank despite their intentions to save more?

An often overlooked facet of financial literacy is an understanding of how psychology can impact habits around saving and spending. This article explores the fascinating ways in which psychology influences our saving behaviors and offers valuable insights into how we can overcome psychological barriers to become more effective savers.

The power of emotional influences

Psychology plays a significant role in shaping our saving habits, and emotions are one of the key drivers. For example, research suggests that individuals with higher levels of positive emotions, such as happiness and contentment, save more money than those who are less satisfied with their lives. 

This phenomenon may be due in part to the fact that positive emotions can create an expanded mindset and allow individuals to build psychological, social and intellectual resources. When individuals feel satisfied with their lives, they are more likely to focus on the future and make thoughtful financial decisions. So, happiness can be the antecedent to more savings rather than just a consequence of wealth. Conversely, negative emotions, like stress or fear, can hinder saving efforts. In times of distress, people may resort to impulsive spending or seek short-term relief through retail therapy, undermining their long-term saving goals. 

Present bias and instant gratification

Humans are hardwired to seek immediate gratification, which can hinder our saving habits. The tendency to overvalue immediate rewards and discount larger, future rewards is called “present bias.” The desire for instant rewards often leads to impulsive spending and a disregard for long-term financial goals. 

Individuals who allow present bias to guide their behavior can demonstrate undesirable borrowing, spending and saving patterns. Advertisements and marketing strategies capitalize on this bias by creating a sense of urgency or excitement around purchasing products or services. Consequently, consumers are frequently combatting not only their own biases but also the marketing efforts of major corporations. 

Recognizing present bias and developing strategies to counter it — such as setting realistic short-term goals or implementing delayed gratification techniques — can help individuals overcome instant gratification bias and save more effectively. 

The influence of social norms

Social norms greatly impact our behaviors, including how we save. Many people are influenced by the spending habits and financial attitudes of their peers, family and social circles. The fear of missing out (FOMO) can lead individuals to spend beyond their means to keep up with societal expectations. 

Additionally, evidence suggests that materialism and societal expectations can lead to beliefs that quality of life will increase with purchases and more favorable views toward debt. Similarly, the pressure to conform to certain lifestyles or material possessions can sabotage saving efforts. Becoming aware of these social influences and surrounding oneself with like-minded individuals who prioritize saving can positively impact personal saving habits.

Mental accounting and cognitive bias

Mental accounting refers to the tendency of individuals to separate their money into different categories based on subjective criteria. This division can lead to suboptimal saving decisions. For instance, individuals may save diligently for a specific goal, like a vacation, but overlook the importance of building an emergency fund. 

Cognitive biases, such as the anchoring effect or loss aversion, can further cloud our judgment when it comes to saving. For example, research demonstrates that people typically exhibit an asymmetry in saving behavior in response to adjustments in income. When people experience decreases in income from their reference (baseline) level, they save less. 

However, when people receive increases in income, they are not more likely to save. This phenomenon may be in part due to hedonic adaptation; people increase their baseline living standards more easily than they decrease them. Understanding these biases and adopting a holistic approach to financial planning can help individuals allocate resources more effectively. 

The power of habits and automation

Psychology tells us that habits are formed through repetition and consistency. By harnessing the power of habits, individuals can make saving much easier. Start by building a habit of investing or saving a small percentage of your monthly income. This will help you to solidify the habit of saving every month. Then, once your habit is developed, you can save more by simply increasing the percentage you put away. 

Conversely, you can leverage the power of automation to help you save more money. Setting up automatic transfers from a paycheck to a savings account can remove the need for constant decision-making and willpower, making saving effortless. In fact, research suggests that automatic enrollment increases 401(k) participation and overall savings. Additionally, technology such as budgeting apps or financial management tools can provide reminders, track progress and offer insights into spending patterns, thereby reinforcing positive saving habits.

Understanding the psychological factors that influence our saving habits is crucial for financial literacy. A better knowledge of our psychology can help us to create effective financial strategies and become more successful savers. By recognizing the impact of emotions, biases, social influences, mental accounting and habits, individuals can take proactive steps toward building a solid financial future. By employing strategies like delayed gratification, being mindful of social norms and leveraging automation, we can empower ourselves to make better financial decisions and achieve our long-term saving goals.

Jacob Bingham is a project manager at Stage Marketing, a full-service content marketing agency based in Pleasant Grove.