Tag Archives: ramit-sethi

The Problems with Saving

In 2007 the average American saved 0.6% of their income. By February of this year that had risen to more than 4%, but in the 1980s it was 10%.

With this in mind, Tim Harford asks why are we such awful savers, and what can we do to improve the situation?

Behavioral economists […] have uncovered three reasons why people find it so difficult to save. The first is temptation: Although we often later regret it, we just can’t resist spending. The second is lack of understanding: Our brains can’t quite grasp the profitability of saving. The third is optimism: We believe that everything will work out, even if we don’t save.

The solution offered to counter temptation sounds very similar to the behaviour Ramit encourages in his readers:

[Researchers at UCL] found that imagining a future purchase is almost as good as getting it. For example, when we daydream about buying a new car, our brains respond in much the same way as when we actually make the purchase.

We can harness this buzz to our benefit by discarding vague ideas of “saving for a rainy day” and focusing instead on particular items we need or want. […] Reinforce this connection in your mind by opening a different savings account devoted to each of your goals: one for a new car, one for a vacation, one for a child’s college tuition fees.