The Psychology of Saving
We recently announced Tandem’s upcoming launch of Autosavings — a set of rules to help people improve their savings behaviour.
I’m Dylan, a Product Manager at Tandem and in this series, I explore some of the psychological factors that affect savings and explain why we think Autosavings will benefit our customers.
Current Customers
Firstly, it’s important to understand the approach to saving that our current customers have. In recent months, we have held weekly testing sessions at Tandem HQ (London, UK) where we discuss savings habits and run through prototypes. Some customers explained in detail their complex savings habits, with multiple savings accounts, regular movement of money and a love for excel. However, for each regular saver, there were several customers who didn’t save, and crucially, did not think they could.
In fact, a recent survey indicated that over one quarter of people in the UK put aside no savings at all each month.
Learned Behaviours
There are several psychological explanations for this. One argument is that savings habits are developed over time by learned behaviours — people who have been brought up in a frugal household, where expensive gifts are few and far between, are more likely to save than those who have been raised in an environment where excessive spending is common.
Similarly, those who grow up in relatively poor households living pay cheque to pay cheque are used to money being spent as soon as it is is received. When debt is normal, you can become desensitised — saving is often an afterthought.
In addition to this, people who have made a few attempts to start saving but have been thwarted by an unforeseen payment or a bill that is higher than usual, tend to build up a mentality that saving is an unachievable goal. The ‘traumatic’ experience of saving all month just to see their hard worked wiped out by one bill leads to a perception of saving as a negative experience — combining the psychologically painful daily process of saving with the even more unpleasant feeling when it fails. Instead of the promised reward, they end up with a feeling of guilt.
There are plenty of other examples of learned behaviours that contribute to the notion that there are ‘non-savers’ and ‘savers’ and that making the transition to become a ‘saver’ is just not possible. However, the reality of learned behaviours is that they can be ‘unlearned’ and with the right help new learned behaviours developed.
Present Bias, Loss Aversion & Inertia
Another explanation is present bias, the tendency for individuals to place greater value on payoffs that are achieved in the present moment, rather than receiving the same or greater payoff in the future.
It suggests that people can be time-inconsistent, favouring immediate spending over long-term saving and making decisions that their future self might regret.
The theory of loss aversion explains the human tendency to prefer avoiding losses to making equivalent gains. Therefore, the positive emotions that come with saving an additional £50 a month are often overshadowed by the negative emotions that come with the corresponding loss in spending.
This is especially true if someone feels like they have to spend their whole month saying ‘no’ to themselves every time they make a purchase.
Along with inertia, the general dislike of change and preference for the status quo, these theories combine to work against the ‘non-saver’, leading to the idea that saving is impossible. The sheer number of savings and investment options for users to choose is overwhelming and confusing even to those who work in finance (myself included!).
Nudge to save
As a result, saving is often seen as an insurmountable challenge and too daunting a task to even begin. However, it needn’t be. It is possible to learn to save in such a way that is not too painful, leaving only the positive feelings that come with saving more.
For many people, it requires a prompt or conversation with a trusted partner to start the saving process. At Tandem, we have the exciting task of building a feature that can nudge people into saving, developing new learned behaviours and turning the impossibility of saving into a reality.
If you want to be an early tester for our new Autosavings feature, please sign up here. We will be releasing on Android first, with iOS following closely behind.
Read part two: The 3 Stages of Saving
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