An excerpt from a book I am reading right now called “A Random Walk Down Wall Street“:
“Two suggestions have been made to overcome people’s reluctance to save. The first is to overcome inertia and status quo bias by changing the framing of the choice. We know that if we ask employees actively to sign up for a 401(k) savings plan, many will decline to join. But if the problem is framed differently, so that one must actively “opt out” of the savings plan, participation rates will be much greater. Corporations that frame their 401(k) savings plans with an automatic enrollment feature (where a conscious decision must be made to fill out an “opt out” declaration) have far higher participation rates than do plans where employees must actively “opt in” to the plan.”
There is this aversion to saving because it leaves us with less money to spend. Even if it’s a small amount like say $1, most would prefer to spend rather than save it. It is a never ending cycle that doesn’t change even with an increase in income. This explains why many of us are bad at saving. We are just not ready to take that first step, no matter how small it is. Psychological techniques like the one quoted above are then needed to motivate people to save.
I learnt “why” it was so essential to save by observing the people around me. I grew up in a home where budgeting never happened. We lived in the moment. That along with inflation left my parents next to nothing at the time of retirement. It kind of motivated me to learn more about personal finance, budgeting and investing.
I now take a note of all my credits and debits. I save some, I invest some. I also started investing in index funds, something my family never did before. I have no idea how successful I will be in this “new” personal finance route that has not been traditionally followed by my family, but you never know unless you try. I am reading a lot, not just books that compliment my current outlook, but the ones that thrash it as well, so I can see both sides of the story. I have never learnt so much about personal finance as I have now.
Getting back to the topic, why are people so averse to saving?
- We are conditioned to believe that thinking about money is bad, that only greedy people think about money etc. We are then less inclined to learn about managing money.
- We are not thinking about inflation. Our purchasing power is decreasing. It isn’t the same as it was 10 years ago. Not many understand the seriousness of this, leading to lack of motivation to save.
- We think the interest we earn from our savings account is enough to get us through. But if you take inflation into consideration, you will realize that the money you invest in Fixed Deposits and Savings Accounts are giving us negative returns! We are actually losing money investing in these instruments. This “all is good” bubble that people (including me) thrive in makes them less motivated to save.
- We do not wish to limit our spending. There is a constant internal struggle between wanting to buy it all and also wishing to save. More often that not, the latter wins.
These are just few points at the top of my mind but I am sure many financial experts would be able to cite more reasons.
It is always difficult to take that first step. It is always tough for me whenever I increase my savings. I struggle with that thought inside my head that reminds me my spending capital has reduced.
The trick is to get past that resistance. Once it becomes a way of life, you will realize it’s not so tough after all, and you will end up wishing that you had started sooner.
Edited to add: This wonderful advertisement from the 1960s that perfectly encapsulates the power of savings.