Psychology behind Automatic Saving or Spending
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According to Psychology Today, “There are many psychology theories about how self-control works. The most influential theory(link is external) is that a person’s self-control is a resource that can be used for any task where it is needed. But this resource is limited. When a person exercises restraint, the self-control resource is spent. Less of it is available the next time self-restraint is called for. Replenishment takes time, so that by the end of the day, we are running on empty. This resource theory of self-control has been tested over and over again by hundreds of studies(link is external) over the past decade. So psychologists are quite confident that it is valid.”
There are a million things drawing your attention every day. You are constantly using your self-control as you navigate through the day at home, work, commute, and life in general. Among these, personal finance decisions is one where you are challenged on a daily basis to exercise self-control. You want to save money for retirement, you want to save money for your kids to go to college, you want to get out of debt, and you want to save for emergency funds. You may be procrastinating in one or more of these and not acting on them. To put it simply, saving takes self-control. You may be really good at saving money. Kudo’s to you if you are good at it. However, you still end up using the limited self-control resource available to you.
When you automate your savings, whatever the purpose might be (retirement, college education for kids, emergency funds), it takes self-control out of the equation. The money gets saved and is no longer available in your checking account. Once the “automatic savings” is set up, you have a natural tendency to forget about it. That is the same reason “automatic spending” works against you.
Automatic Spending: All businesses promote and give you special deals to sign up for automatic bill payments – they know two things:
- You will forget to cancel the service after you sign up.
- You will forget that you are actually spending money on a monthly basis. (This has happened to me and it was a lesson of blessing I had to learn the hard way – I consider it tuition fees).
Automatic Saving: The same logic above can work in your favor and hence several employers offer automatic savings directly from your paycheck for retirement.
- You won’t cancel the automatic savings. You have to make a conscious decision to pull money out of your savings or cancel the automatic savings – this will be a difficult decision for you to make since your desire is to save.
- You won’t have access to this money in your checking account to spend.
Here is my challenge to you –
- Take an inventory of how many expenses you have under automatic payment (Netflix, Pandora, Spotify, Amazon Prime, Cable TV, Newspapers, magazines, and other electronic automatic subscriptions) by looking at your bank account or credit card statement.
- Do you see subscriptions you are not using at all? If yes, then cancel the service.
- As soon as you cancel the service, set up an automatic transfer for the same amount to a savings account.
Important Note: I am not suggesting that you cancel your road side assistance.
You will be saving money without noticing any change to your lifestyle. I recently went through this exercise and was able to save $250 per year by cancelling unnecessary subscriptions that I no longer use.
Automatic Saving does two things for you –
- You save money
- You save the limited self-control resource available to you for something else
Automatic Savings is a virtue available for free, capitalize it.