If you’ve ever read anything on this site, you’ll know we have a thing about “saving always comes first”. We have even threatened to write to the dictionary people to tell them to the change their definition!
Now we’ve found even more conclusive evidence about how important it is. You mustn’t just “prioritise” saving in your head, you really must move that money before you do anything else.In 1979, Daniel Kahneman and Amos Tversky noted a psychological trait called the “planning fallacy”: people expect things to take a lot less longer than they actually take. It doesn’t matter what the task is, and it doesn’t even seem to matter if you remind respondents that on previous occasions they have planned over-optimistically, they will plan optimistically again. (Here’s the wikipedia link on planning fallacy.
If you have always handed in your work late, you will predict handing it in early, but you will invariably once again hand it in late. No wonder it took a college professor to come up with this theory! He didn’t need to do anything except keep a register of when his students’ work was handed in.
A fascinating study by Johanna Peetz and Roger Buehler in the September 2009 Bulletin of Personality showed there is a similar trait for saving money: a “budget fallacy”. This not only showed that people spent more money than they planned to spend, but their over-spending is directly correlated to how important it is to them to save.
That’s right. The more the respondents believed that saving was important, the more likely they were to under-predict their spending. They might want to spend less, and save more, but wanting just wasn’t enough.
Reminding them of how much they had spent had no impact. Similarly to Kahneman’s much earlier test, respondents were asked to calculate how much they had spent in the previous week before being asked to predict what they would spend this week. It didn’t matter: even being reminded of their typical spending habits didn’t stop them under-predicting what they would spend.
In the first example of this study, the results showed people predicting they would spend between 23% and 30% less than they had the week before, and then continue to spend almost exactly the same amount.
In subsequent studies, the researchers wanted to see what the influence was of the respondents attitude to money. How did it affect their behaviour if they said they thought a healthy attitude to money and saving was important? Here’s the even worse news: people who wanted to save over-spent their predicted spending by even more than people who didn’t rate it so highly.
Yes, in essence, wanting to save can help you predict that you will spend less money, but it won’t help you spend less. The likelihood is you will spend exactly the same amount you spent previously.
Perhaps more than any other reason, this is why saving has to come first. Instead of just planning or predicting how much we can save, actually saving it first instead will get it into the bank, and not leave it subject to our inaccurate guesses about our spending.
Don’t just think about saving first. Do it first. Get your targeted saving total into your savings or investment account right at the moment you get it, right when you would otherwise just be making totally inaccurate predictions about your savings, and you won’t be part of the statistics.
(The study by Peetz and Buehler can be found
here.
