Saving money is tough.
According to Canstar, around 49 per cent of Aussies have less than $10,000 in their savings accounts.
But why is it so difficult for us to save?
Also read: 4 Ways to Make Saving Money More Fun
Professor Mandy Cheng from the University of New South Wales’ School of Accounting has researched extensively into the psychology behind judgments and decision-making.
She spoke to Yahoo Finance to explain exactly why Aussies are having trouble saving, and what we can do about it.
Problem 1: Mental accounting
People like to engage in a little something called ‘mental accounting’ which is the process of setting aside money for different things like savings or going out – but it’s in your head.
“Mental accounting can be a good thing, because you don’t overspend,” Cheng told Yahoo Finance.
“But it can have a negative impact, because when you underspend, instead of putting that extra money into savings, you spend more.”
Think about it: you set aside $100 to buy a new pair of shoes, but when you get to the store, the shoes are only $70.
So, you buy the $70 pair of boots and instead of putting the extra $30 into savings, you go and spend that on something else.
Problem 2: Saving for ‘future you’
Cheng said it’s easier to commit yourself to doing something if it’s in the future.
According to Wendy De La Rosa’s TED Talk, 3 psychological tricks to help you save money, we think of our future selves as perfect.
“In the future, we're going to save for retirement, we're going to lose weight, we're going to call our parents more,” she said.
“But we often-times forget that our future self is exactly the same person as our present self.”
And the issue with always sorting out our ‘future self’ is that our present self has no self-control.
“People are just bad with self-control full stop,” Cheng said.
And what’s the reason behind bad self control?
“Self justification; you can always justify saving money.”
Solution 1: Take away the temptation
Cheng said the best way to rein in our bad savings habit is to take away the temptation to spend money.
“Set up an automatic transfer when you get paid into an account that you can’t take money out of,” she said.
“Allocate a certain amount of your income into that account, and see how you go. If you get to the end of the month and you don’t feel completely deprived, you can increase that amount by $50.”
Cheng said there’s no magic number you should be putting away each month.
“You can keep increasing that amount as you feel – just work out how much you can live without.”
Solution 2: Take the advice you give
It’s easier to advise other people how to save money than to save money yourself, Cheng said.
“Imagine you’re advising a friend who’s trying to save money. You’re a bit more objective when you’re advising a friend.
“If they’re trying to save money and they ask you whether to purchase something, you’d say, ‘aren’t you supposed to be saving?’”
“Take that advice – stand back and give yourself distance between the decision and the advice.”
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