Money management is an important factor for any individual and therefore saving is a key concern to everyone. Despite this reality, saving on a regular basis is a practice that for most people remains elusive. Attributing reasons such as low wages or high expenses among other external factors may anger some readers, but the real reason is quite often internal and psychological. Therefore once and for all these barriers should be dealt with; otherwise, it will be impossible to progress in any aspect of financial literacy. This article will analyze some of the psychological aspects making saving difficult and suggest some possible solutions.
Among the most critical psychological drivers that impede saving is the inclination for instant gratification. This term describes people’s most common inclination of looking for easy rewards instead of long-term rewards. For instance, when one is nearly retiring and faced with buying a smartphone or saving for retirement, there is usually the smartphone in question which just has to be used immediately no matter how irresistible saving seems.
How to Overcome It:
In order to beat instant gratification, the “pause before buying” technique can be applied. This technique works as follows, when you feel the need to purchase something on impulse, just wait for 24 hours to allow you the necessary time to think about whether that need was really that important or whether that money would be best needed to achieve some savings. The second approach that you can also employ and which is quite different from the first one is to assist people to save money for the purpose by giving them expectations of the future. For example, while the orthodox approach views savings as cutting down on pleasures, think of it as planning for one’s contentment and safety in the years to come.
By definition, present bias refers to the inclination of people to go for immediate rewards rather than delaying gratification in anticipation of better rewards in the future. Present bias in savings has the effect of preventing one from thinking about future financial requirements, such as retirement and saving for a rainy day, but pursuing what is enjoyable at the present.
How to Combat the Situation:
Overcome present bias by incorporating automatic transfers into your savings account. If you are saving because it is mandatory every month, you do not need to choose to fulfill this possibility every time that such a choice arises. You are more likely to stick to your savings plan as the spending money has already been allocated to savings before you have the chance to expand it. In addition, set smaller goals as well which are time bounded to enable you to stay in the saving process by creating a sense of satisfaction.
Most of the people walk into problem of thinking that after putting in so much effort, they can spend the money as they have “earned” it. This view can lead to wastage of money and thus public resistance to saving. I do understand that indulging in retail therapy, going out to eat, or buying new treats on oneself offers great emotional pleasure, but it shortchanges financial objectives.
How to Overcome It:
For the reason of breaking this pattern of excessive buying or emotional spending, it carries an even greater challenge of being able to reward oneself in a non-monetary manner. Rather than spending the money on new clothes or an expensive meal, take part in some fun more economy-friendly activities. Recording how much money has been spent and why can also be helpful in order to find out what makes one spend money on needless things.
Another psychological barrier to saving is the absolute certainty regarding the coming income and the savings potential. Many individuals have the mentality that they will be able to save high amounts in the future and hence regret why such actions are not taken today. Such plans can go out of the window because of unexpected costs, life creep, or instability in the job market.
How to Overcome It:
To prevent falling into such a trap, let individuals consider starting saving whenever they can, however small the amount may seem to be. The sound of compound interest will make it possible for the value of saving a little today to surpass that of saving a lot of tomorrow. It may be difficult to now, but forget the common belief that saving becomes easier at some stage in future and change that habit now, regardless of how much income you have received.
The majority of people experience financial anxiety, and this can lead to avoidance. The fear of checking account balances, preparing for large outflows, or contemplating retirement can drive individuals to such extremes as ignoring their finances altogether. This brings about a vicious cycle of avoidance and rampant financial instability.
How to Overcome It:
Also, make sure to avoid this phase of your life by using target savings instead of your money. Allocate that amount monthly and in steps that will be easy for you and guide you through that anxiety safely.
Comparing ourselves to others is a powerful driver that people use to control their saving patterns. That is, if one sees their friends, family, or colleagues spending money on vacations, dining out, or purchasing new cars, it creates pressure to do the same. This kept-up-with-the-joneses attitude serves to entice most of the people to borrow and spend rather than save.
How to Overcome It:
Spend mindfully so that your decisions regarding spending are not dictated by social pressures but rather, your own values. Set your own financial targets and remember, as challenging as it might be to do so, the feeling of financial security will provide much more in terms of satisfaction than any need to please others. Furthermore, be with friends or groups who support financial health, so that the desire to spend is diminished.
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