Why Automating Savings Isn’t For Everyone

Why Automating Savings Isn’t For Everyone

iStock_000079509469_MediumAll the experts recommend it. “Automate your savings and set up recurring transfers. Arrange for the transfers to occur shortly after payday so the money comes off the top of each paycheck. That will help you budget your spending and avoid overdrafts.” — Kiplinger

However, when it comes to personal finances the systems you set up only work as well as you do. If you are automating savings and want to watch that savings grow, the No. 1 thing you need to do is not touch it. Yet, 62% of Americans have less than $1,000 in their savings accounts and 21% don’t even have a savings account against the advice of all the experts, according to a Google Consumer Survey for personal finance website GOBankingRates.com. So what is happening exactly? Why are Americans not saving as much as they should? Behavioral psychologists have reason to believe it has something to do with using electronic money over cash. In fact, a study by Dun & Bradstreet found that people spend 12% to 18% more when using plastic instead of cash.

They attribute this overspend to the fact that electronic money doesn’t feel real. You are not physically holding or being accountable as you would for cash. There is no emotional connection or pain when you have to spend electronic money, and the immediate effect of having less money in your pocket doesn’t happen or the feeling can be avoided altogether until you decide to check your balance at a later time.

This same digital money effect can happen with our savings. You will often find people who say they save routinely with automatic deductions or transfers, but then turn around and spend exactly what they saved before the month is over. They see the money in their savings, know it’s there but can’t leave it alone when an opportunity to spend comes up.

Moving to a cash system can be very beneficial to Americans who struggle with this problem. Although it may seem archaic and inconvenient, it has definitive benefits. Turning off your automatic deductions and physically withdrawing your savings, spending and bill money may actually help you save more! Every month place each amount in an envelope and write what it will be used for. Every time you remove a bill from a particular envelope, it will trigger feelings or reactions of pain. Cash is physical; you touch and feel it. When you spend a bill, you have less left in your wallet. You can see that there is less and process that feeling immediately. Subconsciously, you will be encouraging yourself to spend less just to avoid the pain associated with spending.

Dr. Eric Agner, philosopher and behavioral economist from George Mason University who wrote A Course in Behavioral Economics, tells us “People who use cash really do spend less.” If you have issues leaving your savings put after the automatic deposits and transfers happen, try an all-cash system to see if physically having to handle your money works better for you.