Psychological Nudges for Saving
Have you ever wondered if there were little psychological things you could do to change the way you think about money? Perhaps by changing the way you categorize things in YNAB? Or whether you allocate items as budgeted or tracked accounts? Maybe even whether you choose to include the money in YNAB at all? Have you found any particular psychological trick to be helpful?
These are all questions I've found myself pondering recently. A bit ago I opened a 1% interest checking account at Aspiration. I stashed all of my money in there, including taxes (I'm an independent contractor so, no withholdings). Eventually however, I began to develop a false sense of security as I saw that account grow. A lot of the money in there would ultimately go to the government! I believe my spending has increased because my account balances are inflated.
Other times I have raided balances I perceived to be unnecessarily high ("medical expenses" is a big one for me) - but then a friend had a $6,000 hospital visit for something seemingly minor and I found myself spooked, fearing I had cheated myself by reallocating that money.
It's made me wonder a lot about the way I categorize and the names I give to things. I wonder if I titled my "medical expense" category something like "INSANE EMERGENCY fund" if I would be less likely to raid it.
I've also wondered if mixing my spending visualizations with my savings visualizations is perhaps a recipe for disaster, or if there are other subtle psychological tricks that could help me reach my goals better and faster.
To avoid some of these issues, I've been sending most of my savings to off-YNAB accounts (non-budgeted, non-tracked accounts). It seems to me that surely when I'm contemplating spending, I'm only going to feel enabled by seeing huge dollar amounts floating around everywhere - so I'm trying to impose a sense of poverty in my spending visualizations.
I wonder also if there could be benefits in changing the way I visualize and think about my savings. If I'm amassing money in a retirement account, does it really matter what the current balance is? Wouldn't it be neat if I could have YNAB change the default display for savings accounts from dollar balance to projected retirement spending ("$200/month available for retirement spending")? Or for a college fund, change the display from dollar amounts to projected paid for semesters of attendance (".25 semesters of your son's education funded")?
To take this a step further, why not just change spending visualizations too? Spending seems to be facilitated by seeing dollar amounts, because we often think of spending in dollar amounts ("$1,000 for an iPhone X???"). But if my default display were a percentage of money left or a pacing indicator (as seen in the YNAB Toolkit), and I had to click a button to see dollar amounts, would my spending habits change? I think so. How much more would they change if these were accompanied with my savings recommendations above ("2 months of retirement fully funded")? I bet a fair amount.
So again, any tricks up your sleeve? What have you found to be helpful?
We differentiate between "Unavoidables" and "Expenses." Unavoidables are fixed amounts that always need to be paid (i.e. rent, insurance, loan payments, etc). Expenses are things that we need but we can impact the number through habits (i.e. carpooling lowers our "Gas" expense).
I also think the order of items on your budget is psychologically important. Ours goes as follows:
We put Giving before Expenses because it reminds us that our money can do a lot of good for other people, not just us. In the Sinking Funds category, we put the more essential ones (i.e. Car Repairs) before the fun ones (i.e. Travel). And we actually have to scroll to get to our Lifestyle money, which helps to keep our main priorities in focus.
I also think taking some time to calculate what different savings scenarios would look like is helpful. My wife and I do this with our student loan debt: What would happen if we just kept up minimum payments, and what will happen if we keep it up? And what would happen if we pushed even harder? Knowing those actual numbers and putting them somewhere you can see them (mine are on my desktop) can be very motivating.
I started with a few savings goals and as things come up, I add new ones. With most of my goals I have a monthly funding goal and an upper limit. Have only reached a few so far and I generally move on to the next goal when that happens. The especially large ones, like a new home, college for children or a retirement goal, I keep off budget and only look at them once a month, when I fill out my net worth report.
Initially, when I started YNAB, I felt rich after I had saved up a little and spent it. Today I realize there are many "emergencies" that can come up and save for more of them. Giving every dollar job helps a lot.
Guess you could say I value my savings more than I did in the past.
One thing I'm realising is that I need to save in specific, named, categories.
I have a number of categories for saving (eg Next Year's Holiday) but I also have one simply called Emergency Fund, intended for general emergencies. I manage to save into most of the specific, named, categories, but because the Emergency Fund is so general I tend to abuse it - for example not put enough into it, or transfer money out of it in order to shore up other categories that I've overspent in. I think it's because with the other, named categories, I can see what I'm losing if I transfer money out of them, eg I won't have enough money for a holiday next year.
Another thing is saving at least a little bit into each savings category each month, even if it's not really enough.
For example, with my New Car category, the amount I ought to be saving is so much if I need to buy a car in the next two or three years that I tend to feel it's hopeless, so I don't put any money into it at all. I've decided to lower the monthly goals on categories like this, so that at least I put a little money in them each month. (This tends to be for lower priority categories, like the new car - I live in a city so I can live without a car if necessary when my current car gives up.)
We have a variety of different "savings" categories and they are ordered in such a way that as I do my budget, I save FIRST, then budget to necessary expenses, and then discretionary and lifestyle categories are last.
My categories are as such:
Emergency Fund (Reserved only for major job loss or illness -- this is strictly an income replacement savings)
Savings Goals (New car funds, vacation, home down payment, furniture, and Roth IRA funding)
Rainy Day Funds ( Car maintenance, hair cuts, Christmas, gifts, subscriptions)
Necessities (Groceries, gas, cell phone, internet, life insurance, household expenses)
Dog Expenses (vet care, food, toys/supplies)
Discretionary (Eating out, entertainment)
Health & Wellness (Gym membership, spa treatments, fitness clothing/gear)
Typically, after filling all those line items, there is money still left over, so then I just look to see what's coming up and either decide to save more or spend more in other discretionary categories. Just depends on what's coming up for that month.
Fooling yourself. Definitely a thing.
I discovered I do better if I have very specific True Expense categories and budget a little each month to each of them. Mathematically it doesn't matter if I budget $100 to Cqar Insurance one month and then $100 to Road Tax next month or $50 to each every month. Psychologicaly it's much easier to steal from budgeted amount that month. Even if I raid the category one month, I almost never budget negative number to True Expense category. And this way the True Expenses build up faster even with occasional raiding.