“Save now! Enjoy later!” shout the voices. They are genuinely worried about our future financial state of being. They know that we want to live in the moment, how we want to enjoy life while we can, throwing caution to the wind as we revel in the fruits of our labour. They shout, not at our clichés, but because we should be saving. Sure, starting to save now makes perfect sense. Everyone knows that. So we do hear them, we just don’t listen to the voices.

But do we consciously decide not to listen?

Psychological studies frequently explore the intricacies of decision-making and its link to behaviour. What’s often apparent is the importance of rewards in reinforcing this behaviour. While our brain’s process of making decisions might be complex, we’re effectively making a choice that would provide the best returns – or so we think.

If we’re spending more on cars than on our (future) wellbeing, are we really deciding on what’s best?

People love their vehicles. They get us from A to B and enable our lifestyles. Vehicles are important, but we attach disproportionately high values to them. 22seven users spend roughly ten times more just running and financing their cars than they do on their savings. And even more when including insurance, and the other expenses that accurately reflect what our vehicles cost.

22seven users spend about ten times more on their cars than on savings.*

Is your car ten times more important than saving for the future? The answer is obviously no unless, perhaps, you’re a taxi driver. A taxi driver who lives in your car. And uses it to save orphans on the weekend. And is the beneficiary of a trust fund. For the rest of us the balance is out because decisions on what to spend where – and, more importantly, when – are difficult, given how our brains have evolved to compare value.

Having to make a decision between two or more outcomes, the benefits of which occur at different points in time, is referred to as Intertemporal Choice. These choices come with a tradeoff between costs and benefits, such as immediate consumption versus a better payoff in future. A popular example of this gives participants two choices: receive R100 now, or R200 in two weeks’ time.

Which would you choose? And what if the choice was the latest iPhone now, or a sizeable nest egg for retirement? In similar studies participants are more likely to choose the smaller immediate reward rather than the larger delayed reward.

Users also spend as much on bank fees as they do on savings. And twice as much on cell phones.

A number of Behavioural Economics biases (for example, Time-Inconsistent Bias) also suggest that we’re wired to prefer immediate gratification over future gain. When you consider this need for instant gratification, and our preference for instant rewards, is it any wonder that most of us would rather spend money on tangible things that we can experience right now?

It’s not all short-term doom and gloom though. There are techniques that can help us make better long-term decisions.

Studies show that when we think of our future selves, our brain interprets ‘Future Us’ as a stranger. When presented with an image that’s digitally altered to make us look older, we’re more likely to connect with Future Us. Researchers also suggest imagining what Future Us would be like (think interests, personality, and activities) as this makes it easier for us to plan long-term.

Economist Shlomo Benartzi has devised a programme called Save More Tomorrow™. Using a behavioural approach to saving, Benartzi and his team have been helping people save more efficiently for over 15 years by changing how we think about “tomorrow”:

Need a quicker fix? Have your savings or retirement contribution taken off your salary before you’re paid and take the effort out of decision-making entirely, while ensuring that your future self will be taken care of.

Sometimes, identifying where you spend the most can be the first step in understanding that you need to make changes. You may not even realize that you’re overspending, but ‘everyday’ expenses like owning a phone can add up when you see it all in one place: the latest smartphone, data, airtime, insurance, trendy cover, and other extras all add up to make a phone a potentially expensive lifestyle decision. Whether it’s adding up your bank charges, seeing how much mileage you’re really getting, or communicating your phone costs, 22seven brings everything together and puts it front and center, making it difficult to ignore.

Further Reading:
Understanding Consumer Decisions Using Behavioural Economics [PDF]
Having a Hard Time Saving? Channel Your Future Self
Your (Virtual) Future Self Wants You To Save Up

 

*Stats compiled based on anonymous aggregation of data. No data is available for individual users.

The Svens

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The Svens are your link with 22seven and work together to produce some of the content on our blog when they're not helping people get more out of our awesome apps. Have something to say?
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