Four psychological reasons why we find it hard to save

Ever wondered why you struggle to save each month, despite your best intentions? Only 49% of Brits are managing to put money aside every month1, and rising living costs, declining wage growth – and even Brexit – are all partly to blame.

But major psychological obstacles also get in the way of us saving more for the future. Here we explore the thinking patterns preventing us from stashing away enough cash for later years, and the psychological quirks that can sabotage our financial plans.

1. The optimism trap

“It seems we – as human beings – are not well suited to dealing with money.” That’s the view of behavioural experts at London Economics. According to Dr Annette Cerulli-Harms, a senior economic consultant at the firm, our inherent bias to value the present more than the future is also compounded by our difficulty to anticipate our future needs.

A skewed view of the future is one reason why splashing out on a swanky smartphone can take priority over say, saving up for a house. According to recent studies, most people suffer from an “unrealistic optimism” about their ability to plan for the future.

For instance, a recent study asked undergraduate students to predict when they would submit their thesis. Over half of them took longer to complete it than their most pessimistic estimate, based on “if everything went as poorly as it possibly could.”2

Another study found that people, when asked, were overly optimistic about their health in old age3. According to social psychologist Thomas Webb, this leads to a double whammy: “people are likely to underestimate their need to save and be overly optimistic about their ability to do so”.

2. The urge to splurge

Will power is a funny thing. Saying ‘no’ to unnecessary purchases sounds simple in theory, but when we’re in need of a quick mood boost, fighting temptation can feel like an epic struggle. And there are studies to back this up. Researchers have identified a common tendency, called the ‘hot-cold empathy gap’, whereby people often fail to anticipate how strong the urge to spend will be in a critical moment e.g. indulging in a takeaway after a long day at the office.

Have a habit of splurging when you’re stressed about work, or upset about your relationships? Research suggests you’re not alone here either. Studies have found that when people are in a bad mood, their priorities shift away from long-term goals and towards getting out of the emotional turmoil as quickly as possible4.

1 Data based on results from an online survey, conducted by Atomik Research on behalf of Legal & General, among 2,002 UK adults aged under 65 (18-64). The survey took place between 14 and 16 January 2018. Atomik Research is an independent market research agency that employs MRS-certified researchers and abides to MRS code. Data is available upon request.
2 http://web.mit.edu/curhan/www/docs/Articles/biases/67_J_Personality_and_Social_Psychology_366,_1994.pdf
3 https://www.researchgate.net/publication/229481626_Saving_for_a_Rainy_Day_Comparative_Optimism_About_Disability_in_Old_Age
4 https://pdfs.semanticscholar.org/26e9/c66997ce5a975a09141a21078c0f7aaaab39.pdf

The bad news is, even when we do show self-restraint, it can still come back to haunt us. Research by Roy Baumeister and colleagues suggests that people who have recently exerted self-control by keeping calm in a meeting at work, for example, may find it harder to resist a later attempt at persuasion5, such as an email offering a good deal on a spa break.

3. Problems with mental accounting

Even if we do pride ourselves on a sensible attitude to money, ‘mental accounting’ can lead to overspending without us even realising. “People have a tendency to code, categorise or evaluate monetary values in different ‘mental accounts’,” says Dr Kristina Vasileva, a senior lecturer in Finance.

“For example, most us agree that £900 would be an acceptable price for the latest top of the range mobile phone, even though there are plenty of cheaper alternatives. However, when it comes to spending £0.99 on an app for our phone, we may stop ourselves and want to think about it for a day because we are used to apps being free.”

4. Yes, bad saving habits can be inherited

Psychological barriers might not be the only thing getting in the way. Studies have found that our upbringing can hugely impact our savings too. “Family background and socio-economic characteristics of parents are crucial in determining our saving behaviour,” comments Dr Vasileva. “Household and personal finance management is something which is attained, we are not born to be naturally financially-savvy”.

The good news is that research shows most people are receptive to offers of financial advice6. And although people can be slow in adopting advice – e.g., on the benefits of switching to a high-interest rate savings account or a stocks and shares ISA – once they do, the advice tends to stick.

So how can we hack our brains to overcome these psychological barriers? And is there a way to circumvent negative habits we’ve picked up from our parents?

The opinions expressed in this article are those of the individual experts and may not be representative of Legal & General. We are committed to bringing you a wide range of views on the best ways to save and spend your money.
5 http://www.jstor.org/stable/10.1086/338209
6 https://www.journals.uchicago.edu/doi/10.1086/380085

Ever wondered why you struggle to save each month, despite your best intentions? Only 49% of Brits are managing to put money aside every month1, and rising living costs, declining wage growth – and even Brexit – are all partly to blame.

But major psychological obstacles also get in the way of us saving more for the future. Here we explore the thinking patterns preventing us from stashing away enough cash for later years, and the psychological quirks that can sabotage our financial plans.

1. The optimism trap

“It seems we – as human beings – are not well suited to dealing with money.” That’s the view of behavioural experts at London Economics. According to Dr Annette Cerulli-Harms, a senior economic consultant at the firm, our inherent bias to value the present more than the future is also compounded by our difficulty to anticipate our future needs.

A skewed view of the future is one reason why splashing out on a swanky smartphone can take priority over say, saving up for a house. According to recent studies, most people suffer from an “unrealistic optimism” about their ability to plan for the future.

For instance, a recent study asked undergraduate students to predict when they would submit their thesis. Over half of them took longer to complete it than their most pessimistic estimate, based on “if everything went as poorly as it possibly could.”2

Another study found that people, when asked, were overly optimistic about their health in old age3. According to social psychologist Thomas Webb, this leads to a double whammy: “people are likely to underestimate their need to save and be overly optimistic about their ability to do so”.

2. The urge to splurge

Will power is a funny thing. Saying ‘no’ to unnecessary purchases sounds simple in theory, but when we’re in need of a quick mood boost, fighting temptation can feel like an epic struggle. And there are studies to back this up. Researchers have identified a common tendency, called the ‘hot-cold empathy gap’, whereby people often fail to anticipate how strong the urge to spend will be in a critical moment e.g. indulging in a takeaway after a long day at the office.

Have a habit of splurging when you’re stressed about work, or upset about your relationships? Research suggests you’re not alone here either. Studies have found that when people are in a bad mood, their priorities shift away from long-term goals and towards getting out of the emotional turmoil as quickly as possible4.

1 Data based on results from an online survey, conducted by Atomik Research on behalf of Legal & General, among 2,002 UK adults aged under 65 (18-64). The survey took place between 14 and 16 January 2018. Atomik Research is an independent market research agency that employs MRS-certified researchers and abides to MRS code. Data is available upon request.
2 http://web.mit.edu/curhan/www/docs/Articles/biases/67_J_Personality_and_Social_Psychology_366,_1994.pdf
3 https://www.researchgate.net/publication/229481626_Saving_for_a_Rainy_Day_Comparative_Optimism_About_Disability_in_Old_Age
4 https://pdfs.semanticscholar.org/26e9/c66997ce5a975a09141a21078c0f7aaaab39.pdf

The bad news is, even when we do show self-restraint, it can still come back to haunt us. Research by Roy Baumeister and colleagues suggests that people who have recently exerted self-control by keeping calm in a meeting at work, for example, may find it harder to resist a later attempt at persuasion5, such as an email offering a good deal on a spa break.

3. Problems with mental accounting

Even if we do pride ourselves on a sensible attitude to money, ‘mental accounting’ can lead to overspending without us even realising. “People have a tendency to code, categorise or evaluate monetary values in different ‘mental accounts’,” says Dr Kristina Vasileva, a senior lecturer in Finance.

“For example, most us agree that £900 would be an acceptable price for the latest top of the range mobile phone, even though there are plenty of cheaper alternatives. However, when it comes to spending £0.99 on an app for our phone, we may stop ourselves and want to think about it for a day because we are used to apps being free.”

4. Yes, bad saving habits can be inherited

Psychological barriers might not be the only thing getting in the way. Studies have found that our upbringing can hugely impact our savings too. “Family background and socio-economic characteristics of parents are crucial in determining our saving behaviour,” comments Dr Vasileva. “Household and personal finance management is something which is attained, we are not born to be naturally financially-savvy”.

The good news is that research shows most people are receptive to offers of financial advice6. And although people can be slow in adopting advice – e.g., on the benefits of switching to a high-interest rate savings account or a stocks and shares ISA – once they do, the advice tends to stick.

So how can we hack our brains to overcome these psychological barriers? And is there a way to circumvent negative habits we’ve picked up from our parents?

The opinions expressed in this article are those of the individual experts and may not be representative of Legal & General. We are committed to bringing you a wide range of views on the best ways to save and spend your money.
5 http://www.jstor.org/stable/10.1086/338209
6 https://www.journals.uchicago.edu/doi/10.1086/380085