The most frequent strategy employed by people for saving is to “save what’s left over.” We all know the outcome of this strategy! Unfortunately for many people there is little that is “left over.” Everyone we’ve met understands the importance of saving and most people have a desire to do so, but they just can’t figure out how to start this process when it seems there is nothing to be saved.
From our experience at FHI, we have found that when we “reframe” what it means to “save,” more people begin to make attempts at saving. The concept of “Framing” in the world of Behavioral Economics means that people respond to different ideas or messages depending upon how the message is presented. The idea of “saving” already comes with some pretty significant connotations, but the concept is overly simplified.
How Do You Make Savings Happen?
Perhaps the most popular idea is to tell someone how much money they could “save” if they stopped going to Starbucks. Then there’s the (somewhat useful) heuristic of “pay yourself first,” but how do you make that happen? Let’s first identify the barriers, then we’ll talk about how we reframe this issue.
Savings to Cushion Economic Shocks
No matter how we plan to manage our income and expenses, we will eventually encounter economic shocks. These are unexpected events that tax our ability to cover costs, like auto repairs, a hospital visit, or a drop in income. Economic shocks don’t have to cost a huge amount to disrupt our plans and cause us to feel stress and scarcity: we might anticipate $100 for utility bills but unusual weather for the month might increase that to $150. That extra $50 needs to come from somewhere. Having some money in savings can provide cushioning for these economic shocks, reducing how much they disrupt our lives and increase our stress level. Despite this, a significant portion of Americans report they have little or no money in savings.
61% of Households Don’t Have Enough Savings to Cover $1,000 Emergency
One major item to point out here, is that 61% is – well – over half of the country. It’s not just people in poverty or on benefits, it’s the “middle class” too.
According to the Bankrate organization, “More than one-third of households, 34 percent, endured a major unexpected expense over the past year, according to Bankrate’s latest Financial Security Index survey, with only 39 percent saying they would cover a $1,000 blow with savings… When calamity did strike, the average expense was more likely than not to cost at least $2,500.”
Barriers to Saving
One of the biggest barriers that prevents people from saving has to do with a pervasive belief that saving is only worth doing if the amount being saved is a large number. At FHI, we have a concept we call arbitrary monetary devaluation, which people use to justify how they look at money. All humans, whether they are aware of it or not, have in their heads a dollar amount below which money holds no value for them. A penny, a nickel, a dime, a quarter, even a dollar, although it could be saved, isn’t worth it in most people’s minds. But if we can re-frame this idea that any amount constitutes “saving” then people tend to begin feeling more confident in their ability – changing the dialogue away from “I can’t save” to “I can do that!”
Establishing a Habit of Savings
Even saving a dollar per week seems insignificant to most people and hardly worth it. So instead of saving a dollar per week, what do they do? They save nothing, because they don’t see the value in it. Granted, saving a dollar per week won’t provide for a comfortable retirement, but it is a dollar per week more than you would have if you didn’t save it. And saving a dollar per week establishes a habit of saving.
Saving Any Amount, Adds Up Over Time
When money is tight, people find it especially hard to save. They focus on the bills they need to pay and the fear of not having enough, which leads to tunneling, which makes it harder to see the little areas where a dollar or two could be set aside for later. These little amounts of money seem totally insufficient to meet the perceived needs, but even little amounts have value and can add up, over time.
Building Savings into Your Plan
When you are able to see that saving is more about implementing a behavior than it is about any particular dollar amount saved, you can perhaps begin to see value in doing it and it changes the (inner) dialogue about what it means to save. So, pick an amount that you believe you can comfortably save over the next day, week, month, or whatever. A penny, a dollar, ten dollars, twenty-five dollars, it doesn’t matter. Pick an amount. Start small. Work it into your budget as a line item. Start saving. Start now. And keep going.
Small Steps Toward Savings
We all have barriers that make it hard for us to put together a workable savings plan, but if we have something in savings, even if it’s just a small amount, that will help us overcome the inevitable economic shocks we will experience in our lives.