Research-Backed Savings Tips

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Ruby Blog

Published 9 months ago

Ever been to a supermarket to get an item, been greeted by a wall of colorful options, and become paralyzed by choice?

This over-abundance of choice and information has been termed “analysis paralysis” - what happens when the sheer level of choice prevents us from making a choice.

This phenomenon exists in the financial world too. With so many deals, offers, and promotions, deciding how best to save can feel paralyzing.

Today, we’re breaking it down - and breaking you out of financial paralysis. Let’s take a look at some ways to simplify this problem and take back control of what’s financially ours in an information-saturated world.

Automate Your Savings

Tap into the power of habits. James Clear talks about this in his famous book, Atomic Habits. It’s based on the premise that we underestimate the value of small, frequent actions, instead telling ourselves that massive success requires big moments.

So it’s better to set up habits that encourage you to save - rather than relying on that one big contract or month of saving.

Research seems to support this. One behavioral study on 4,000 participants found that savings automation is correlated with improved personal financial outcomes.

Why does automation work so well? Because you’re removing the on-the-spot decision you need to make to save. By automating your savings - or any habit you want to build - you don’t need to worry about forgetting to transfer your money to a savings account, or an impulsive splurge getting the better of you.

There are a bunch of easy ways you can automate your savings, so it happens in the background without you needing to think about it:

  • Lots of employers let you put a certain percentage of your monthly salary into a pension plan. Also, you’ll likely have the opportunity to contribute an additional percentage yourself, perhaps within a specific range. This will be deducted from your salary at source and go into your plan. So, then you’re saving automatically.
  • Another option is to explore what options you have to route money automatically to a savings account, perhaps even long-term savings options such as an IRA account.
  • You can also automate your savings when you shop. Instead of relying on future you to research coupon codes and compare prices at different stores, just download the Ruby app. Simply open the app, then shop like normal at your favorite stores. Once you’re done, tap autofill and all the possible discounts or coupons will be applied automatically. It’s a no-brainer way of ensuring that you save money, helping spare you from analysis paralysis.

Budget, Then Track Your Spending

Set a budget and stick to it by tracking your spending. We know it’s the most boring advice possible, but there are plenty of banking apps that make budgeting easy. For example, on Emma, you can connect all your bank accounts, set budgets for each category, and track your spending. You’ll also get alerts if you go over a budget - so you don’t need to rely on a spreadsheet.

It’s also a good idea to track how much you’re saving. Ruby’s the best way to do this. You can track everything you’ve bought, plus every discount, loyalty point, and cash back dollar you’ve earned.

Separate Your Spending

If you’ve watched The Big Short, then you may remember a great scene where CDOs (Collateralized Debt Obligations) are explained by Dr Richard H. Thaler and Selena Gomez at a blackjack table. Thaler understands that economics, previously thought of as wholly rational, often proceeds as a result of behavioral decisions instead. The example he uses is of basketball’s ‘hot hand fallacy’ where a player makes a series of shots one after another and assumes that they’ll continue to make those shots. People assume that what’s happening now will continue indefinitely into the future.

This is supported in research at Michigan State University, which found that we have a tendency to do mental accounting based on our emotions. The example they cite is one of not finding money for bills, but having money to spend on a night out. The choice isn’t rational at all, but is instead borne of emotion. A lot of us probably recognize that tendency in ourselves, so think about how it can be combated.

Formalize it in a structured way with different accounts for different purposes. Have an account for paying household bills. Have a separate emergency funds account. Have a separate savings account. Label each one if you can in the online banking app. This will help keep you organized.

Making Saving Easy

So, as Thaler understands, the first limiting factor to be addressed is our own nature. The more we can take our behavioral limitations out of the picture, the easier it becomes. The more we can automate these choices so that we don’t have the option to make an emotional choice, or run the risk of forgetting, the easier it becomes. The more of a routine it is, the easier it becomes.