How you’re hardwired to suck at saving money
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Cashflow28 May 2017

How you’re hardwired to suck at saving money

When it comes to spending less money and saving more, most people tend to bury their head in the sand. Everybody hates budgets, and I get it. The idea of spending your nights and weekends crunching numbers in spreadsheets doesn’t appeal to most people. Most people have a fear of budgets (and sometimes even numbers), and see budgeting as a process that will force them to spend less money and make drastic lifestyle sacrifices.

But what if I told you that getting this right is the single biggest factor that drives how successful you are with money? That getting this right doesn’t necessarily mean ‘cutting back’ and does mean that you’ll be able to spend more on the things you truly enjoy? Budgeting, if done right, can direct a series of smart choices with your money to move you closer to the things you want out of life faster. And unless you invest a small amount of time ASAP to get this area right, you’ll always be missing out. Time really is of the essence; let me show you an example to illustrate this.

Imagine that for the next 10 years you don’t worry about any of this. No budgets. No savings plan. No conscious spending. You just live in the moment and enjoy what you’ve got. Then 10 years from now you decide to give this a good crack. You then invest $10k each year for 10 years into an share type investment returning 8% p.a., and stop contributing after the 10 year period ($100k total investment). You leave the money to grow, reinvesting the income (dividends) for the next 20 years (a 30 year total investment). At the end of this period your investment would be worth $750,815. Not bad right…?

Then consider this alternative. You make this a priority and find a way to find that $10k spare cash each year. Today. You then invest the money into the same investments. Same strategy, same investments, same contribution amount. But you start today. You invest your $10k p.a. for the next 10 years, then leave the money to grow for another 30 years. This is the same timeframe as the scenario above, but because you get started today your money is invested for an extra 10 years. At the end of this 40 year period your investment would be worth $1,666,540; more than double the amount in the previous scenario!

With both examples, you put in the same amount of money over the same timeframe. The difference with the first example is getting started 10 years sooner. But there is a massive difference in the outcomes you will get. This is the power of making this a priority and getting started and whilst your figures might be a little different here (e.g. maybe you don’t have $10k each year to invest), the difference in outcomes is similar.

The problem with this is, most people can’t find an extra $10k to save or invest. But I’m here to tell you that a good savings, spending, and banking strategy can make this possible. When you get your planning and strategy right within these areas, you can squeeze more money out of your current situation which if deployed smartly, means you’re going to be a big step toward building up your assets and investments for the future. Invest the time to get this right at the start and you’ll give yourself a massive advantage and benefit for years to come.

Without a solid strategy and system you’ll be trapped in the constant ‘juggle’, shuffling money from one place to another to cover your expenses, sometimes even spending on credit and then cutting back to pay it down, and not growing your savings and investments at the rate you want. As you saw above, this type of thing WILL hurt you in the long run.

So why do we struggle to get on top of our savings? In my experience, there are some common myths and roadblocks about saving and spending that stop people from getting the outcomes they need from their money, so I wanted to take some time to cover these so you don’t fall into these traps. It’s impossible to separate psychology and decision making science from money, so in the second section of this post, I’m going to explore how our ‘inner human’ drives how we spend our money and give give you some tools to ‘game your thinking’ to make it easier to get the things you want out of your income.

Myth #1 “You have to count every dollar”

When I start talking to my clients about their savings and spending, I can tell they get a little nervous. Most people think that managing their money better means counting every dollar they spend and a general cutback to their lifestyle.

I’m going to bust a big myth here. A good savings and spending plan doesn’t need to mean drastic cuts to your lifestyle or needlessly ‘counting your pennies’. It doesn’t need to take time to manage (although it does take a little time to set up). Good money management means prioritising the things you most enjoy and ruthlessly cutting out things that don’t give you real value. It’s so easy for these low value costs to creep into your spending, but these are the things that hold you back from getting the other things you really want. Cutting out these low value costs ‘frees up’ cash to be directed to other areas.

I’ve been working with a client for a little while, we’ll call her Rachel. When we met, Rachel was saving strongly and wanted to buy a property. Because Rachel didn’t know how to go about buying property or how much she needed, she wasn’t sure whether her current saving was going to get her into her property in the timeframe she wanted. So Rachel kept saving, more and more aggressively. Rachel loved to travel, but hadn’t taken an overseas trip in two years because she wanted to save to buy her property. When we took the time to plan out Rachel’s strategy, we found the property purchase was achievable in a timeframe she was happy with, even with her spending more and saving a little less than what she was currently doing. Rachel was stoked; the travel fund was filling up and Rachel started booking flights.

When chatting to Rachel after we’d finished this process, she mentioned she was not expecting to be able to spend more money as a result of setting up her cashflow system. Better management of your savings and spending doesn’t have to mean cutting back.

Myth #2 “Figuring this out is easy”

The people I meet through my Financial Advice or coaching work have their finances in varying shapes. Some are in a complete mess with no structure at all, while others have a system they’ve been using to drive results, with differing levels of success. Some have achieved good results through cobbling together tips and tactics from various sources. The ones that have had the most success normally have a process where they review their progress and what has worked and what hasn’t, then they adjust what they’ve been doing to make things easier on themselves.

For the ones that are the most successful with their money, this often takes years of effort and energy to reach this point. These people spend a lot of time thinking about and managing their money. They enjoy money success, but when we chat they always tell me they’d like to be able to get these results WITHOUT having to spend so much time managing their money. And even the people that have been most successful doing this themselves still haven’t been running their spending and saving as effectively as they could.

Over the last five years or so I’ve been heavily focussed on helping people with their personal finances and in particular, their savings and spending. In that time I’ve developed a system that drives better results. This system has been developed through testing what works and what doesn’t, exploring any issues or roadblocks that come up, solving problems, and then refining and improving the system. In the last year I’ve found the system is now at a point where it works so well that I don’t need to refine or improve it. Now I say this not to talk about how awesome my system is, but to highlight the fact this took me almost five years of work. I worked on this system day in and day out, testing what worked and what didn’t for hundreds of people, refining, adjusting, and improving. This was incredibly rewarding, but also a lot of work.

What I’m saying here is, figuring this out by yourself is hard. It will take up a lot of your time and energy. It will be stressful at times. And unless you’re a personal finance genius or have spent years of spare time learning about this stuff, you won’t get the same results you would from following a proven system that has been developed over years of time and effort. And let’s face it, nobody wants to spend their nights and weekends crunching numbers in a spreadsheet and analysing the results, tweaking payments and looking at the best apps and tools to manage your money.

Unfortunately, the odds are against you

The more research and writing I do about money, the more I realise the odds are stacked against us. The way we manage our money today is very different from the way money was managed in the past. It’s getting easier and easier to spend money, and more and more complex to save money and get ahead. As I’m writing this post, I read a story online that cash withdrawals from ATM’s are at an all time low, because more people were choosing to transact electronically through mediums like ‘Paywave’ and ‘Tap and Go’.

And it’s no surprise that as technology makes it easier to spend our money, this plays into the consumer economy and hands of the multinational corporations who want us to spend our money on their products, governments that benefit via increased tax collections when we spend money, and of course the banks that want us to rely on their credit at astronomical interest rates.

There is a surprisingly high amount of psychology and decision making processes that drive the way we manage our money. The more I learn about these decision making processes and our psychology, the more I realise that the way most people manage their day to day savings and spending dooms us to financial mediocrity at best, and the more likely outcome is years of slow progress, frustration, and eventually having to settle for money and lifestyle outcomes of a much lower standard than we want (and deserve).

There have been some high profile economists, behavioural psychologists, researchers, and nobel prize winners that have done much research on our money decision making processes and psychology. And it’s probably no surprise to you that you’re unlikely to read about their key findings on your new credit card application form.

I must admit that before I started doing this research around a year ago, I wasn’t aware of all this material and its impact on how much you save and money management. But I had seen it in practice over years through helping people with their money, seeing what worked and what didn’t. When I stumbled onto this material as part of my writing research, it all started making a lot of sense.

I never knew why the system worked, and to be frank I didn’t really care. All that mattered to me was that it worked. But, if only I’d known about this sooner I probably could have saved myself a bunch of time by applying these principles to the work we were doing. You live and learn…

The research in these areas has shown how our psychology and inbuilt decision making processes makes it more difficult to get the outcomes you want from your money. The effect of these biases and decision making systems are subtle, but their impact is significant. Most importantly, understanding these factors is the first big step to overcoming them. Below I’ve outlined the biggest issues you need to understand to game the system and make it easier to get the results you want from your money.

Brain Hack #1 – Create small barriers

The example explored in the research was around an office worker and a container of chocolates. In the experiment, one person had the chocolates sitting on their desk in easy reach and visible, another on their desk and in reach, but out of site in a non-see through container, and the third had the chocolates in a cupboard six feet away from their desk. As humans we can be extremely motivated, but also extremely lazy at times.

It probably won’t surprise you that the group with the chocolates in a cupboard six feet away ate less than half the amount of the group with the chocolates sitting in clear containers on their desk. But, what may surprise you is that those with chocolates in the clear container on their desk ate more than 65% more chocolates than those with the chocolates in the same location on their desk but in a container they couldn’t see into. This means that even the tiny barrier of not being able to see the chocolates has a significant impact on our behaviour.

When you think about how this applies to your money management, think about having all your pay deposited into your everyday bank account with online banking that shows your everyday account right next to your savings account where breaking your budget is only a swipe away, or a credit card in your wallet within easy reach. There is no barrier between you and your money, so you spend more and get off track. Put some small barriers in place between you and the things you don’t want to happen, and you’ll be surprised how much easier it is to get the things you do want.

Brain Hack #2 – Your willpower is a limited resource

Roy Baumeister is basically the Albert Einstein of decision making research. This groundbreaking social psychologist was one of first to explore the concept of willpower, and his findings have a serious impact on our chances of success with money. Baumeister found that willpower is indeed a limited resource, and the more we have to use our willpower the less we have ‘left’ and the more we’re likely to give into temptation. He conducted experiments around the ability to use our willpower to focus on solving an impossible problem. He tested two groups, one who attempted to solve the problem after having resisted the temptation of eating some delicious food, and another that worked on the problem without having to resist this temptation. Baumeister found that when you have to ‘spend’ your willpower trying hard not to do something you want (e.g. resisting the temptation of food), you give up much more easily on another task requiring willpower. This means that when your limited resource of willpower is spent, your ability get your willpower working in other areas is reduced, and you’re more likely to give up.

Think about a time when you’ve been on an intense health kick, or grinding away kicking goals in your career, or trying to cut back on your spending. I bet you found you were more likely to slack off in other areas. When you’re working hard, you can lose the willpower needed to motivate yourself to exercise or you find it easier to give in and justify a big ticket expense or booking a holiday (because you deserve it, right?). When you’ve been cutting back on expenses to save more money you might find it harder to eat healthy and next minute you find yourself binge eating junk food and drinking wine on the couch during a serious Netflix session. I know I’ve been there.

When you’re flexing your willpower, resisting temptation in other areas is just that little bit harder. When it comes to your overall finances this will have an impact, but when it comes to your day to day savings and spending management, the impact is even greater. The more you have to use your willpower to stick to your everyday spending plan, the more likely you are to give into temptation and the less willpower you’ll have left to use in other areas of your life. To avoid suffering the consequences of ‘willpower depletion’, you should set up your everyday money management in a way that doesn’t require your willpower to work.

Brain Hack #3 – Stick to ‘Defaults’

As humans, we have this inbuilt tendency to resist change and stick to our default settings. I know I definitely experience this personally. Change is uncomfortable, usually because it means we have to exert energy. And we tend to be a little lazy. The great news is that if you know what to do, you can actually use your inbuilt resistance to change as a way to help you get better results from your money.

Much of the research that has been done around this tendency to stick to our default settings has shown that even when it comes to money, we are happy to maintain our status quo. I’ve seen this many times in practice where people seem to get stuck, either doing something, or sometimes doing nothing. They know they aren’t getting the results they want or could get with a little input, but they don’t change. It’s easier to stick to their defaults.

Richard Thaler and Cass Sunstein have done some great research on this in the US and found that when people had to opt-in to a retirement plan, over two thirds did not. This retirement plan required no contribution from them other than doing the paperwork to opt into the scheme, and they would then get free money contributed by their employer while they were an employee. Free money is hard to come by, but these people couldn’t break away from their defaults to do the work needed to take the free money on offer. In the same research, they looked at what happened when people were automatically opted-into the plan by default. Over 90% of the employees participated. This is the same scheme with the same people! The only difference was the ‘default setting’. With something as serious as a retirement plan, surely this shouldn’t matter. But it does.

When you’re structuring your personal and everyday spending and saving, keep in mind what your default setting is. Make this the outcome you want. Automate your savings. Automate your debt reduction. Automate your investments. Don’t set things up so you need to do ‘something’ (read: anything) to get the results you want. Make success your default and you can happily give into your human tendencies knowing you’re on track to get the results you want.

Long story short – you need a system

I’m a systems guy. I feel that most things in life can be broken down into a process you can follow to get the outcomes you want. Your savings and spending is no different, although I do understand that especially when it comes to money, it doesn’t always come naturally.

A great savings and spending plan / strategy is really important, but a great plan alone won’t get you great results. You need a system that supports the strategy to make it work, one which makes it easy and most importantly, will make it happen. To give you some insight into what I mean, I’ve included a diagram of the banking system we use to help clients manage and automate their savings and spending so it ends up in the right places at the right times.

Pivot_Banking-structure-diagram Apr17

Now how you manage your money is a personal thing, so I’m not saying this works for everyone. But this system (or a system like it) can support a savings and spending plan and make everything just ‘happen’. When we set something like this up for someone, they know exactly where their money should be at any time, and by following this structure we can automate payments so it all flows without any input of time or energy (or stress).

Whether it’s a banking strategy like the one above, an investment plan, or debt repayment strategy, automate these wherever possible to reduce your time input and free up your mental energy to focus on other things. The average adult makes over 30k decisions every single day, so you don’t need another thing to have to think about!

When your money management is complex or confusing, it’s easy to get off track and end up throwing your hands in the air and putting real success with money into the ‘too hard basket’.  Keep thing simple, systemize everything, and your money management becomes simple.

Your system shouldn’t be time consuming

I’ve been speaking recently to people about their biggest pain points around saving and spending. One of the most common ones is that they don’t want managing their everyday spending and saving to be something that takes up much of their spare time. And I get it. Nobody wants to spend their nights and weekends with their nose reviewing their bank statements. We’re time poor enough.

But if you use a system like the one shown above, you have the ability to set up recurring transfers to get the right money to the right places, at the right times, all fully automated. This takes a little time to set up and you need to do it right, but when you do, your time input from managing your everyday savings and spendings is eliminated.

When you do this the right way, your bills and any debt will all be paid without you having to think about them, your travel fund will be building up for your next holiday, your savings (or investments) will automatically happen and you’ll receive guilt free spending into your everyday account each week for you to spend. And, hey presto, you can then get on with what’s important to you, knowing your money is taken care off and that you’re getting the results you want.

The added benefit of automating your payments is that you also don’t need to track your costs or review your budget (other than when one of your recurring costs changes). All you really need to know at any point in time is how much is in your everyday spending account. I’ve been using a system like the one above for years now, and couldn’t go back to the juggle. It’s liberating to say the least.

The wrap

How you manage your savings, spending, and banking is what will drive the results you get from your money. It will dictate how quickly you get ahead, how much you have to invest, what you should invest in and perhaps most importantly, it will drive how quickly you’re able to reach your longer term lifestyle goals. If you don’t get this critical area sorted, you’ll suffer through slower progress and will struggle to get the results you want. You’ll also miss a huge opportunity to make the most of your income now and keep more of what you’ve worked for.

Like anything money related, the key is to get on top of this sooner rather than later, but I know it’s not always that easy! Learn from the mistakes I and many others before you have made, and hack your thinking to force yourself to spend on the right things and squeeze more money out of your income. The psychological biases I have touched on in this article are subtle, but their impact is huge; so use these insights to your advantage!

If I can leave you with one tip which makes all the difference, it’s that you need a solid system around your savings and spending which ‘automates your success’ and gives you more money for the things you truly value. This is the only way to remove yourself from the ‘money juggle’ and help you plant the seeds now which your future self will thank you for.

If you’ve found this useful and would like to drive better results from your savings, spending, and banking, check out our new free e-book on How to spend BETTER and save MORE. It will take you through the steps you need to follow to set up a rock solid savings, spending, and banking strategy that will automate your success with money. Enter your details in the box below to get it delivered straight to your inbox.


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