The Psychology of Saving Money

-Written by Cel

Most of our blog posts are about practical, tangible things. Our methods for grocery shopping, how we manage our financial system as a couple, that sort of thing. Our book is mostly in the same vein – specific, concrete advice on how to save money on concrete expenses. This is important, of course. These are directly relevant and applicable to people’s day-to-day lives. However, the psychology and philosophy behind our approach to finances is important as well. If you don’t have the right mindset (which can be different from person to person), it’s easy to screw up your finances no matter what tips you follow.

You should have a financial goal and keep it in mind. There are a lot of people who spend all, or almost all, of what they make. One study in 2013 found that 40% of employed Canadians spend all of (or more than) their net pay. We believe that it’s important to have a goal in mind – in other words, why are you saving money?

There are countless good reasons you can choose from. Ours is financial independence and early retirement. For someone else, it might be a desire to own a home. Many couples want to raise a family. Lots of people have a dream of travelling. Or you might simply want the security of knowing that any unforeseen emergencies would not cripple your finances.

For some people, saving comes naturally. Some people are not inclined towards expensive hobbies or impulse spending, and thus not need to exert much mental effort in order to save. But that isn’t the case for everyone.

If you find it difficult to save, and find yourself having urges to buy things that you don’t truly need (at the expense of your savings), you need to have a goal firmly fixed in mind. Choose one that resonates with you, something that you really identify with and adopt with enthusiasm.

If no such goals come to mind, and you also have little to no savings, I would suggest visualizing what kind of life you want to have. Unless you are truly happy having no savings (not the case for most people) – then think of what life you would want to have, and how saving money could help make it happen.

Another thing to be aware of is your psychological outlook towards fun and entertainment. For some people, fun and happiness is almost synonymous with spending money. But this is counter-productive to a healthy financial situation. and highly inefficient.

When it comes to losing weight, both diet and exercise are important. But diet is far more relevant. Why? Because it’s a lot easier – and more efficient – to not eat a a cup of yogurt, than it is to run two miles.

Likewise, it’s a lot easier – and more efficient – to not buy a smartphone or iPad than it is to earn several hundred dollars.

Consider this quote from a popular financial blogger, Mr. Money Mustache:

Paul Allen’s 414-foot Octopus yacht has engines totaling 19,000 horsepower, which burn about 622 gallons of diesel fuel per hour at cruising speed. It’s currently off the coast of Australia, a journey which took about $780,000 of fuel to make. This is an inefficient way to have fun. A man skilled at having fun should be able to achieve equal bliss within walking distance of his own house….

After all,  which would you rather be, the man who requires 622 gallons per hour of diesel and a crew of 60 to have fun, or the one who can do it just by stepping out his front door?

For a more down-to-earth example, would you rather be someone who needs to spend close to a hundred for a night out to have fun, or someone who can do it by calling some friends over and maybe splitting a pizza or six-pack?

I am not saying that you should spend your free time playing Solitaire or watching videos on YouTube. But if all your entertainment or things that give you happiness revolve around spending money – and you are not saving – it may be a good idea to adjust your mindset.

This can be as simple as making small adjustments. For instance, take a person who’s had a tough week at work. Their customary pick-me-up is to go to the mall for “retail therapy”. Over time, they come to associate spending money with pleasure, happiness, and stress relief. This is a plausible scenario that probably applies to many people, at least to some degree.

Instead, they could try going for a bike ride, walking through a park, spending an evening at the library, or any number of free/low-cost options. A relatively small change, but one with significant potential impact.

Again, there is nothing wrong with spending money when it truly makes you happy. But that should not come at the expense of your savings or financial well-being.

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1 Comment

  1. I believe Paul Allen’s yacht also came up as an example in Peter Singer’s The Life You Can Save. Singer’s perspective is a little different though as he suggests that Paul’s money could have been put to much better use ie. saving lives in some of the world’s poorest nations. While no one doubts that Paul’s yacht brings him a certain degree of happiness, one has to ask just how MUCH is he really getting? Surely not more than that of someone who goes from being blind to seeing again? ie. for the gas bill alone on that particular journey he could have brought sight back to literally thousands of third world citizens suffering from operable cataracts. This is obviously just one example but hopefully it’s something that people will start considering more when they look at how they spend their money … ie. when is enough, enough? how much do I really need? will this purchase make me happy? could I put this money to better use? etc.

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