Understand Your Finances
To save more money, follow these essential tips
For years, a bunch of articles and studies have touted the benefits of thoughtful saving and investing. But this hard work and scholarship ignored a crucial factor: people are irrational, and we don't often do what's in our best interest when it comes to the health of our bank accounts.
Behavioral economics takes a slightly different perspective. It focuses on how peoples' behaviors are connected to the way we save and spend money. In 2017, the Nobel Prize in economics went to behavioral economist Richard Thaler for his work showing the link between a person's behavioral patterns around money and their savings rate.
One of the most interesting things about Thaler's conclusions offer clear tips for ways that you can start saving today. Here are some takeaways:
1. Make saving automatic
Thaler's work shows that employees are more likely to save for retirement when their employers "nudge" them to do so. In corporate America, this nudge has translated into a growing number of companies that automatically enroll their employees into 401(k) retirement plans. Some even automatically increase contribution percentages every year.
You don't have to rely on your employer for the nudge: you can do it yourself by taking the thinking out of your savings. For example, having your bank automatically move some of your paycheck into savings every month is an easy way to achieve your savings goals.
2. Get specific about your saving goals
Another behavioral economics study demonstrated that changing the way you think about a goal can affect how much you save. For example, imagine that you're saving for a large purchase, like a car. The more precisely you describe the goal, the better the outcome. So, instead of saying, "I'm planning to buy a car," focus on your ideal and say, "I'm saving for a hybrid SUV with leather interior." The additional details can help you visualize your goal—and become more motivated.
3. Get more sleep
Studies have shown that getting more sleep can improve your health, cognition and overall happiness. Recently, researchers even connected sleep to income, determining that increasing your average weekly sleep by just one hour coincides with a 1.5 percent increase in wages in the short run, and a 4.9 percent income increase in the long run.
This should come as no surprise, since we all generally feel cheerier and more energetic after a great night of sleep. So, if you're trying to decide if you should stay up late, think about your paycheck and ask yourself if you'd like it to increase.
4. Start a gratitude journal
Another recent study found that jotting down the things you're thankful for can also help you save money. According to the study's authors, focusing on gratitude makes you more appreciative and cognizant of what you have. The research shows that this can affect the way you spend: you're less likely to try to fill the void with shopping sprees if you practice gratitude for what you already have and value.
5. Save with a friend
If you've ever worked out with a friend, you probably already know how much accountability can help when it comes to physical fitness. According to a recent study, the same goes for savings goals: self-help peer groups can provide you with the community and support that you need to help you stick to your saving plans.
Consider recruiting one of your work friends to save with you. Start a blog and share your saving or debt payoff journey, or join a support group of people your age who want to learn how to save more. By making yourself accountable to a peer group, you create external pressure, which can help sway you when you're tempted to overspend.
Tricks like creating peer pressure, getting enough sleep, and focusing on gratitude may seem like odd ways to change your spending habits. But that's the key to behavioral economics: by changing the habits that you've built around money, you can change the way you relate to it—and the way you save it.
Farnoosh Torabi is a Chase News contributor.