Our minds are wired against saving. How to defeat this natural trait?

People say they often want to save but the reality is that they struggle. The reason?  People say they don’t earn enough money. However, it turns out that the issue is more extensive than income because even those who can save, do not. Why? behavioural finance is not about how you should act but rather about how you do – Our brains find it difficult to save. The brain is wired as a computer and people rely on particular environmental triggers to access certain information and habits.   

Standard economic theory argues that individuals who have properly aligned incentives and access to all relevant information will make optimal and rational decisions but investigations reveal that our brains can be biased, decision-making based on rules of thumb, swayed by social influences, or self-limiting beliefs. 

Why do our brains find it difficult to save? 

1. Reference points often influence financial decisions. One consequence of this is that losses tend to loom much larger than gains. Such loss aversion makes people prefer the status quo and value current possessions disproportionately. 
2. Saving often feels like an immediate loss and may be significantly more unpleasant than the perceived benefit of gaining that same amount of money. This concept is called hyperbolic discounting, which explains we prioritize immediate rewards instead of later rewards. Research shows that 8 out of 10 people prefer short-term gains over long-term rewards. 
3. Cash makes the “pain of payment” salient, one may spend less freely when paying with cash than when using a credit card, which offers immediate consumption and delays the “painful” moment of payment. 
4. People often have inaccurate beliefs or preferences about probabilities or chances. They may be overconfident about their ability to manage finances, just as the vast majority of people tend to think they have superior intelligence, health habits, driving habits, immunity to cognitive biases, etc. 
5. People also tend to be risk-seeking for low-probability gains or high-probability losses. Both tendencies can explain behaviours that appear unreasonable, such as chasing ill-fated get-rich-quick schemes or purchasing lottery tickets, while neglecting the slow and steady accumulation of savings.
6. A failure to follow through on one’s best intentions is a pervasive feature of our decision-making. People tend to overestimate the significance of their intentions and underestimate the importance of situational or contextual facets when making predictions about their future behaviours. We all tell ourselves that our wallets are under the best care but overconfidence leads to poor analysis. 
7. The famous Stanford marshmallow experiment reminds us that when given the option of one marshmallow now, or two after waiting 15 minutes, most kids won’t wait. People would rather take the option to consume immediately than wait for more in the distant future. Completely different neural systems are activated for choices that involve present pay-offs versus choices that involve only future pay-offs. 
8. People face struggles to navigate unexpected hassles, attend to and remember important details, and cope with unexpected setbacks that contribute to a range of planning failures. A common example in time management is called the planning fallacy, or the tendency of individuals and institutions to take significantly longer to complete a task than planned, even when similar planning mistakes have been made before.
9.  A correlation can be used in budgeting: giving up on a long line at the bank delays opening an investment account, failing to notice the fine print leads to an expensive mortgage, and so on. It is easy for savers and program designers alike to under-appreciate just how complex saving can be. It requires several small, repeated choices, some of which may involve a detailed series of coordinated steps. Obstructions at any point could derail the whole plan to save.

Be Open To Learning More. 

It’s now very clear that one should be open to learning more about money in general and one’s behaviour towards it. Psychologists often emphasize that it’s difficult to solve a problem that one isn’t aware of. The first step towards achieving financial freedom is understanding that you are in chains and need assistance. 

Actively committing to saving combats bias. A Harvard study found that participants who reflected on their saving goals gave higher contributions and saved more. 

So, you don’t have your finances in order and that is okay!  Now that the big admission is out of the way, what’s next? Financial institutions need to design their programs with this sensitivity in mind. The responsibility of financial service providers such as Lay Up Technologies includes providing consumers with convenient alternatives to credit; improving the purchasing behaviour of people who cannot purchase an item outright.  

Reducing hassles and simplifying structures could encourage increased saving participation both among high and low-income earners. Saving is already strenuous for the brain, convenience and simplicity, therefore, are a must-have. In our team, we’re constantly looking for ways to shape better spending and saving experience for all. However, simplicity and convenience continue to reveal better results for our bottom-line. LayUp exists in a niche market within the South African fintech space. We offer more than transactional payment technology because we’re actively striving toward educating and providing consumers with a financial inclusion tool that builds wealth through a transparent and trusted pre-payment Lay-By solution.  

Through cloud-based tracking, collections and reconciliation capabilities, we equip various industries with digital technology that provides businesses with a hassle-free recurring payments solution. Our products cater to various industries by prioritising convenient integration options built for all business sizes. For example, in our Lay-By aspect of the business merchants can easily integrate LayUp’s technology with eCommerce plugins for Shopify, Magento, WooCommerce and custom integrations. Our in-store technology extends to an iOS and Android app, POS and RESTful API integrations. We are growing with you in various stages of your life- From retail to burial planning. 

Save Now, Enjoy More Later
Change your spending habits. 

Our spending habits are influenced by many factors including emotions. For example, the adverts we engage with are based on eliciting and provoking excitement, joy, adrenaline, desire, and more. We are not immune to this stimulation. We have colloquially termed it “ retail therapy”- the fixing of one’s heart by shopping more. Saving requires that you become aware of how certain events move you towards swiping more. 

A layby is still the perfect paying method to help manage your shopping habits and emotions. You can entertain your excitement with financial caution. You can “ fix your heart” without damaging your pocket. Our economy is financially exposed. Consumers are struggling to make ends meet. Debt-driven solutions aren’t going to create the South Africa we all want. 

Emergency Fund. 

Short-term savings are popularly recommended by financial advisers and policymakers.  An emergency fund is a savings account dedicated to unexpected expenses—ideally 3 to 6 months of living expenses. Emergency funds boost our feeling of financial safety which supports us make better financial decisions.

Tax-Free investments 

In 2015, SARS introduced Tax-Free Investments as an incentive to encourage household savings. Loss aversion means that people conceptualize tax as a loss rather than a  gain. The tax-free investments may only be provided by a licensed bank such as FNB, ABSA, Capitec, Standard Bank, etc,  long-term insurers like Momentum, Old Mutual, etc, a manager of registered collective schemes, the National Government, a mutual bank, a cooperative bank, the South African Postbank, an administrative financial services provider, and a person authorized by a licensed exchange to perform one or more securities services in terms of the exchange rules. 

• You don’t have to pay income tax, dividends tax, or capital gains tax on the returns from these investments.
• a person is limited to an annual limit as well as a lifetime.
• The current annual limit currently stands at R36 000.

More personal finance savings tips to help you

References

G.Edelman, P. Goldman-Rakic, E. Kandel, and T.Sejnowski.( 1992) Learning, Recalling, and Thinking. Available at https://www.ncbi.nlm.nih.gov/books/NBK234153/ Accessed : 2022/08/15

P. Tantia, S. White,J. Wright, (2011)  A behavioral Economic Perspective  on Innovation in Savings Program. Available at https://www.ideas42.org/wp-content/uploads/2015/05/A-Behavioral-Economics-Perspective-on-Innovations-in-Savings-Programs-1.pdf Accessed : 2022/08/15

Author Unknown.(2022) Tax free Investments.Available at https://www.sars.gov.za/types-of-tax/personal-income-tax/tax-free-investments/ Accessed : 2022/08/15