Financial Wellness

Why saving money is hard, even when we really want to

Aspects of our psychology make saving difficult, but that doesn’t mean there aren’t ways to make it easier.
A silhouette of a person's head, with the brain area filled with envelopes containing money

This post was written for the Even Blog by Emory Nelms, a Senior Behavioral Researcher in the Common Cents Lab, part of the Center for Advanced Hindsight at Duke University.


“Setting aside savings for the future is important.”

Unsurprisingly, most people would agree with the above statement if asked. In fact, many surveys suggest that people from all kinds of backgrounds say that they want to save money and that they enjoy doing so. This shared desire to save reflects norms around saving that are intertwined with broader aspects of American culture: We should save for a down payment. We should save to send our children to college. We should save so that we might retire independently.

Not only is saving seen as the “right” thing to do, many people can point to experiences in their own lives or in the lives of loved ones that highlight the importance of saving. In some cases, savings cushion the blow of an unexpected expense or a lost job. Other times, savings support flexibility and a well-lived life, like taking the family on vacation or helping a friend in need. When someone has cash savings to fall back on, day-to-day financial decisions are easier, they have fewer worries, and they have more freedom to make choices that allow them to enjoy life.

Research backs this up. Being able to save is associated with lower financial anxiety. Having even a small amount of savings, anything from a couple hundred to a couple thousand dollars, has been shown to help reduce the need for predatory debt, to avoid expensive overdraft and insufficient fund fees, and to help people avoid serious financial hardships.

It is perplexing, then, that asking the question, “How often do you save?” tells a different story. We know we should save, yet many people report that they struggle to do so consistently. People have volatile incomes that often don’t align well with their expenses, and most people do not even have $1,000 in savings to fall back on in case of an emergency. Despite our shared values around the importance of savings and the evidence of the benefits of doing so, many people aren’t saving as much as they think they should.

Why is saving money so much harder in practice?

The disconnect that so many of us experience around saving money — we know we should, we like to do it, but we tend not to — raises important questions about what forces are at work that make saving difficult. Perhaps people can’t save because their income is insufficient and strained. There is plenty of evidence for this — real wages have not risen in decades and a majority of Americans report living paycheck to paycheck. Such prolonged financial hardship and stress makes planning for the future especially difficult, compounding the challenges.

At the same time, though, people in difficult situations can and do save. Doing so is not easy — poor households have much less slack in their budgets and are more likely to have volatile incomes. While many low-income households do save, they tend to do so more irregularly and for shorter time horizons. It isn’t that people aren’t saving but rather that they are more likely to quickly build, draw down, and then rebuild savings again.

Saving regularly can feel like a never-ending, uphill battle.

As a result, saving regularly can feel like a never-ending, uphill battle. To repeatedly build savings in this way requires people to sustain a great deal of motivation without faltering. That is a lot to ask within any context, but this seems to be especially difficult when it comes to financial behaviors.

Immediate spending needs win out over saving for “what ifs”

To understand why this is difficult, it can be helpful to think about why people are saving in the first place. Most of the time, people save for needs that are vague, abstract, and uncertain. This is especially true for emergency or “rainy day” savings. For example, ask 10 people what they might use “rainy day” funds for, and you’ll get 10 different answers.

The problem is that the abstract nature of how we think about emergency savings means it often is less motivating. Certainly, a broken-down car in the present moment creates a very pressing and concrete need. Unfortunately, it’s harder to be equally motivated beforehand, when someone is only just imagining how detrimental a broken-down car would be if it were to happen. When the need for saving is more salient, people are more motivated to do so, which likely contributes to higher savings rates recorded in the early months of COVID.

This “present-bias” makes it difficult to continually save, even when we have the motivation to do so.

As a result, people often struggle to stay motivated, especially when life gets in the way. As people navigate their day-to-day lives, they face many immediate and concrete needs that require their attention. People forget, or they feel much more motivated to focus their attention and prioritize immediate needs while putting off others that may materialize in the future. This “present-bias” makes it difficult to continually save, even when we have the motivation to do so.

Mental accounts and savings

Not only do people often find it difficult to sustain their motivation to save, people also overlook them in the first place. When people mentally organize their finances, they categorize their money into “buckets” that match their needs, like housing, food, car payment, and so forth. These “mental accounts” simplify decision-making and guide behavior. For example, someone may feel more reticent to buy a new shirt with money they have earmarked for their student loans.

Mental accounts provide soft guardrails that make people more aware of the tradeoffs they are making with their purchases. But since general savings isn’t a pressing need, it doesn’t always get its own bucket. Saving is relegated to whatever’s left over at the end of the month — and often, that amounts to nothing. Without that guardrail, people don’t have the small nudge that could keep savings top of mind, prompting them to reduce their spending throughout the month.

Saving money can be made easier

So, what can be done? First, we must acknowledge that individuals are not at fault. When discussing why managing money is difficult and the reasons why people struggle to engage in positive financial behaviors, people are too quick and find it too easy to place responsibility on the individual.

This is not an individualized problem. Certainly, mental accounting and present-bias are both aspects of each individual’s psychology, but these concepts simply describe how people interpret the world around them. The true challenges arise because the environment in which people make financial decisions is set up — sometimes intentionally — to exacerbate the aspects that make saving difficult. The increasing number of convenience-based payments and recurring subscriptions are all intended to fuel consumption, often at the expense of savings.

This is not an individualized problem.

By redesigning the environment, we can improve decision-making and encourage positive behaviors. For example, encouraging individuals to automatically split part of their paycheck between a checking and a savings account means people don't need to budget for, or even remember, to save money every month. Instead of having to sustain their motivation month after month, they simply have to make just one decision to send some of their paycheck straight to a savings account.

Here’s how employers can help

Certainly, financial institutions can and should do more to design products that can make it easier for people to build savings. However, as the example above suggests, employers can also help by offering benefits and services to help their employees save. In fact, employers have tremendous opportunities because of their proximity to someone’s paycheck and because of the important role they play with regards to retirement savings. Similar efforts could be made to offer an employer-based short-term savings benefit by replicating the retirement savings systems.

Employers can help by offering benefits and services to help their employees save.

Employers can work with payroll companies to help develop and offer benefits around short-term savings. Indeed, many such discussions are underway. Benefits such as these would certainly aid employers looking to offer benefits to attract talent, especially with many employers looking to rehire at the same time. Such efforts also help to offset the financial stress associated with lower productivity.

Even more, though, these efforts would be beneficial for employees. The world around us is set up in ways that make good financial decision-making more difficult. At the same time, individuals bear the consequences for mistakes. There are ways in which we can improve this, and that begins with acknowledging that those with the opportunity to do so can and should do more to better structure the environment in which people make financial decisions.

About the author

Emory is a Senior Behavioral Researcher in the Common Cents Lab. In that role, he works closely with partners to find ways that behavioral science can improve the design of financial products and services available to low- and moderate-income communities, both in the United States and internationally.

The Common Cents Lab is a behavioral science research lab within the Center for Advanced Hindsight at Duke University. Common Cents Lab is supported by MetLife Foundation and is part of BlackRock’s Emergency Savings Initiative.

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