Struggling to save money? Blame your brain
When I was young, living on a farm in central NSW, my family had a faded green Valiant station wagon.
Each Sunday on the way home from church, my siblings and I would sit in the boot of the car with the back window wound down as dad tore through the country roads creating a dust storm in our wake.
There were some seatbelts in the car but no one ever considered putting them on.
We didn't wear seatbelts because we drove all the time and had never had an accident, so it didn't seem important.
The fun and freedom in the moment were valued more than acknowledging or mitigating any risk. We were complacent about wearing seatbelts.
This scenario seems absurd now. Putting children in that type of danger is no longer acceptable.
A low perceived likelihood of an accident and high complacency towards wearing seatbelts meant catastrophic consequences for people when accidents did happen (luckily, something my family avoided).
Savings and investments are our financial seatbelts. They protect us when unforeseen, bad things happen.
So why are most of us so complacent about planning for these things and creating financial security?
It turns out our brains are terrible judges of likelihood and chance.
This is linked to a mental bias we call status quo bias, which is assuming that the way things are now, or have been, is likely the way things will always be.
History is littered with examples of how devastating this kind of thinking can be (think of companies such as Blockbuster and Kodak).
So how do we start to build financial resilience? Let's look at three simple things you can do to get the ball rolling:
1. Live by the 80/20 rule: spend 80% of your income and invest the rest
Building financial security is about controlling how much you spend, not necessarily about how much you earn. Many of us live from payday to payday because we spend to our capacity.
Set up an automatic transfer of 20% of your income to an account that is difficult to access, and learn to live off the remaining 80%. Think of your pay as 80% of your income after tax.
Remember, short-term pain will translate into long-term gain.
No matter how much you earn, the 80/20 rule is possible. It will surprise you how easy it is once you get into the swing of it.
2. The six-month reassessment: don't set and forget
Every six months take some time to reassess how you are investing your 20%.
Ask yourself, "Is our investment performing as expected?", "Have circumstances changed that impact our strategy?", "If this was someone else's money, would we advise they do something different?", "What alternatives are there?"
These types of questions inspire conscious reassessment that mitigates status quo bias and helps ward against the curse of complacency.
3. Learn to give
Somewhat counter-intuitively, giving some money away actually makes us better spenders.
It reduces our fear of loss and re-aligns our perspectives, and it feels good when we contribute to improving the wellbeing of others.
It also has the effect of making our communities more resilient, which helps to protect some of the things that impact our own financial security. The amount is up to you, and it doesn't need to be a lot.
And don't make it an automatic transfer because it is the act of consciously giving where the true rewards lie.
One day I hope we will all treat our financial security like we treat wearing seatbelts. It's just something we do.
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