10 Sep 2020 • 7mins • Fonk

The psychology of saving – Wendy Wood reveals the secret behind building habits

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Psychologist Wendy Wood chats to Yolt about the psychology of saving.

When it comes to our money, we can be creatures of habit. In fact, according to Harvard professor Gerald Zaltman, we make 95% of our spending decisions without even thinking about them.

Changing these habits can be tough if you just rely on willpower. So we got together with psychologist Wendy Wood, author of Good Habits, Bad Habits, to find out how we can break free from our old financial routines and create new habits that will help us smash our goals.

Why we behave the way we do

Before getting into the nitty gritty, we wanted to understand why we form unhelpful habits. Here’s the clever thinking behind it.

There are two types of decisions: fast and instinctive or slow and deliberate.

Our habits are the fast kind – the decisions we make automatically, like choosing your favourite brand of crisps at the supermarket, or taking the same shortcut everyday on your way to work. The stuff we don’t really think about, we just do.

Habits can be driven by lots of different things, including your mood and where you happen to be. So while you may have the option of picking the tuna sandwich over the chicken sub meal deal, habit will usually lead you to choose what you’ve had before.

“We think we’re making decisions all the time, when in fact we're very much on autopilot. Understanding how to orient our automated systems is very important and can help us change our behaviour for good,” says Wendy.

But it’s not all on you.

Online retailers are pros when it comes to latching on to these habits. Things like one-click ordering make it super-easy to spend, so you’re less likely to change your mind.

Supermarkets do it too. Ever heard the saying, ‘eye level is buy level’? Shops tend to put more expensive products where you’re most likely to see them, with cheaper products down by your feet. So you really do have to put more thought into shopping on a budget. Cheeky, huh?

Wendy says: “It’s very easy to form spending habits that end up being a problem for your budget. So we have to figure out which habits are working for our benefit and which aren't. Thinking about how retailers and marketers have made it easy for you to spend money, and reengineering the processes that aren't working, can be key in helping you break the habit cycle.”

4 steps to habit formation

Right. Now for the important bit. How can we take our good intentions and turn them into real habits?

“Once the habit is formed, it doesn't require any thought.” – Wendy Wood

According to Wendy, there are four key steps to creating a new habit. These can work for all kinds of things, from healthy eating and exercise to sorting out your sleep pattern. They can also help you become a better budgeter and saver.

Step 1: Create a stable context

This sounds technical, but really it just means creating an environment that will make it easier for you to save, e.g. shopping in a cheaper supermarket, or packing extra portions at dinner so you don’t need to buy lunch out the next day. Routine can play into this too, like making a habit of checking your spending every day over breakfast.

Step 2: Increase friction

The next stage is adding friction. This is about making sure you take time to think before you spend, so you always make the right choice for you. E.g. take those saved items out of your online shopping cart and search this week’s deals instead.

Step 3: Make it rewarding

Lots of people feel good taking back control of their savings, but it never hurts to give yourself an extra ego boost along the way. Gamifying your savings with a money management app can help you visualise your goals and feel more inspired by your money journey.

Step 4: Repeat until it becomes automatic

Did you know, the more you do something, the more you learn to enjoy it? No really – try it! If you keep doing an action over and over, it’ll soon become what you want to do. In this way, habits are a two-way street. They achieve our goals and they become our goals too. Woah, we’re getting deep here…

Wendy puts it expertly: “Once you get motivated, you soon realise that saving really doesn't require a lot of thought. It doesn't have to be a force of dread and horror and boredom in your life. In fact, once the habit is formed, it doesn't require any thought at all.”

What’s really stopping you saving?

Alright, we know what we’ve got to do. So why is it still such a struggle?

It’s easy to tell ourselves that some people are just naturally better at saving. But as Wendy explains, anyone can form good saving habits if they take the time to understand their financial behaviours.

With some thought-provoking research from the experts at London Economics, we’ve found four key behaviours that could be coming between you and your saving.

Noticing loss more than gain

Gaining a fiver should feel the same as losing it, right? Well, probably not. Loss aversion explains how people tend to notice losing something a lot more than gaining something, so they try to avoid any type of loss. Do you avoid switching energy or insurance suppliers because you’re worried about ending up with a worse deal? Sure, you know you might save money, but you might be too nervous to take the risk.

Top tip: Yolt’s Habit builders can help beat loss aversion by nudging you to put money straight into your savings when you get paid. That way the transfer doesn’t feel like a loss.

Giving into that oh so sweet temptation

How are you with self-control? Being able to resist short-term temptation can be difficult, even when there’s a clear long-term benefit. For example, some people tend to put off things they don’t want to do, like constantly saying, ‘I’ll start saving next payday’. There’s always an excuse not to kick the habit.

Top tip: Yolt will give you a nudge if you’re getting close to your spending limit, so you’ll always have one eye on the prize.

Spending and your sense of identity

Are your spending habits part of who you are? If you see yourself as a spender, you’re far more likely to give in to temptation. The same way someone who sees themselves as frugal will save more, just because it fits their sense of self-identity. These kinds of habit can seem ingrained, but can also be broken simply by changing how you think of yourself

Top tip: If you’re not sure, find out more about your money mood to better understand your relationship with money.

Sticking with the familiar

It can feel easier to stick with the default option, whether that’s a sandwich filling or holiday destination. This also goes for your direct debits and rolling subscriptions. But keeping something as a default option could leave you paying more than you signed up for after your contract period ends.

Top tip: Did you know the default option can work in your favour for your saving too? Take The Round Up Jar Booster in Yolt. It automatically rounds things up to the nearest pound and puts the change into your Money Jar, so you’re saving without thinking.

“Anything you can do to automate savings and make overspending a little bit more difficult will help you on your way to financial freedom.” – Wendy Wood

Footloose and financially-free

So many of our choices seem to be made or directed for us, whether that’s by fast-track shopping, direct debits, or even just the world around us. But there’s still time to take back control.

Now fully armed with all of Wendy’s habit-forming secrets, you’ve got the power to decide which habits and autopilot actions might help you reach your savings goals. And the Yolt app has loads of features to get you into the habit of saving.

Feeling psyched? Read the second chapter of our two-part psychology series, The psychology of saving – James Suter teaches us how to reach our money goals.