Saving money is hard. That might sound like stating the bleeding obvious but it is not just those with little income who find saving difficult - all of us are up against a wall of temptation from marketers who continually tell us that we should be out there buying their stuff.
As we get older and have more money, this desire to increase spending does not reduce. There is an old saying: for every dollar our income rises, our desire to spend rises by $2.
The theory of the hedonic treadmill which has been developed by psychologists explains this in part. Some research says that the things that please us today will no longer please us tomorrow - new things pleasure us, but we adapt and then become inured to them.
Last year we may have been delighted to have a car - any car at all, just something that goes gives happiness. But in a couple of years, simply having a set of wheels is not good enough: we need a later model or even a brand new car. Therefore, as our income rises, so too does our expenditure. We have more money but we are on a never ending treadmill to replace what we have with something better.
Up against this, finding the money to save and the discipline to put something aside is a big ask. Even as income rises we still do not save - we have adapted to the status quo and now need bigger, better, newer to make us happy.
To get around this, we have to consciously cap our spending. We know that we cannot expect our brains to make rational decisions about buying stuff: our brains simply cannot make continuous sensible decisions about all these purchases. The brain, being a lazy sort of organ, defaults to habit (what we have done repeatedly in the past) and habits are all too often bad.
The "pay-yourself-first" approach to saving is the most likely solution to beat the brain and save successfully. This approach tries to take some of the pain out of saving by making it a habit instead of something which requires constant decision-making and willpower.
Pay-yourself-first means that instead of paying your bills first, you set aside a proportion of your income to save (say, 5 per cent) before you make any other expenditures. It is only after the savings have been deducted, that you pay your bills and live on the rest.
Pay-yourself-first works because once it is set up, you require no willpower or discipline. Instead of making all your expenditures and living in hope that there will be more money than month, the funds to be saved are out of your bank account and into a savings account automatically. In fact, if you set this up properly, you will not even see the money that you save - it leaves your bank account on the same night as your salary goes in.
You won't miss what you never see and, in any event, saving that 5 per cent becomes a habit which requires no decision-making for your ever-tempted brain.
I take pay-yourself-first to another level by increasing the amount put to savings each time my income rises. It will improve your financial position hugely if you routinely do that.
Obviously you do not put your entire pay rise to savings (you have to live!) but if you can increase your savings with time, whatever you are saving for becomes easier.
It is hard to save, no doubt about it. To be able to step off the treadmill and beat the brain at its own game and those endless marketers, most people have to make savings a habit. Pay-yourself-first is the good habit most of us need.
Martin Hawes is an authorised financial adviser. A disclosure statement is available on request and free of charge, or can be found at martinhawes.com. This article is of a general nature and is not personalised financial advice.
- Sunday Star Times