If there is one thing all financial experts agree on is the importance of saving. Just look up any money managing content and saving is sure to be mentioned. However, according to a JobsCentral survey whose participants were over 3000 workers on a salary, most Singaporeans hardly save. The study concluded close to 60% of the working force in Singapore save less than 1/5 of their monthly earnings. The fraction represents the minimum amount financial advisors advocate for in sustaining retirement and/or other future financial demands.
You may attribute to our country’s high cost of living but then again we are among the top average salaries in the Asia-Pacific. Which begs the question why do most of us fail to save enough? Well, it appears that those affected are probably struggling with Time discounting and Mental accounting cognitive biases that rob their savings accounts of money. Below is a look at each in detail.
What is Time Discounting?
Let’s assume you were walking by the shoe store in the mall and saw these stylish shoes you absolutely loved and wanted to get yourself or gift a loved one but weren’t in the position financially. So when you finally get your salary you look on the shoe store’s website to see if they are still available. You not only find they are in stock but will also have a 40% discount off during Valentine’s day promotion, a week to come. After all the waiting would you go on to buy them now or would you wait a week?
If you are unable to wait for something you don’t require at the moment, you fail at delaying self-indulgence/gratification meaning Time discounting is at play. With the above illustration in mind, Time discounting can, therefore, be determined as the inclination to devalue rewards depending on how far it is from the present time.
Experiments demonstrating this bias asked individuals to choose between $100 in the present or $1000 in the future. The participants based their answer on how long they had to wait for the $1000. For instance, if the $1000 was 1 month or less away most chose to wait but if told the $1000 was months or a year away most opted for the $100.
As you can see only the waiting time changes not the value of the reward. Therefore, impulsive buying is actually future rewards appearing of lesser value due to cognitive bias. This results in making purchases we are not financially ready for instead of waiting.
Managing Time Discounting
It goes without saying the only way to control time discounting is controlling your impulsive shopping tendencies. This will require you to get addicted to saving and for it to be as satisfying a reward as impulse buying which can be achieved by swapping one for the other. Here’s a tip, whenever you come across something that tickles your fancy on the many Singapore streets be it jewelry, clothes, food treats don’t rush to buy. Instead set aside a 1/5 of the money you would have spent in your impulse fund and save the remaining.
Do that every time you feel the need to buy something and only treat yourself when the impulse fund can afford it. In the end, you will be saving more, using 80% less on unnecessary purchases and still spoil yourself once in a while. Eventually, you will fully master the art of delaying gratification which is a key aspect of success.
What is Mental Accounting?
So for instance, there is this $500 phone you have been saving up for and you finally get the whole amount. However, once you are at your local phone shop you find that they are out of that specific brand you wanted. The phone dealer then shows you another phone from a different brand with the same specs but $150 cheaper an even throws in a $20 discount.
You decide to buy the phone because you have saved a total of $170 right? Wrong, what you have simply done is spend less on a purchase. Not realizing that may trick your brain into thinking the $170 is money to be spent thanks to mental accounting. In general, mental accounting is the cognitive bias that causes you to use money differently in various instances and largely depends on the source of the money. For example, you are likely to use discounts, bonuses, cash gifts, cash winnings et cetera extravagantly and less keen than you would your salary and savings.
A more practical illustration of mental accounting is CPFIS investments that resulted in many Singaporeans losing money. Chances are if the same victims were asked to invest from their personal savings and not their CPF resources, most of them would have been reluctant.
Managing Mental Accounting
It’s really simple, just purpose to actually turn those discounts, bonuses, cash gifts into actual savings. How? By moving them into your savings account. Extend this practice to your credit card as well by transferring cash-backs, discounts etc. into your savings. It is advisable not to save your money in a current account as mental accounting bias may cause you to spend your easily accessible savings on unnecessary stuff. Instead, visit any Singapore bank and ask to open a savings account and preferably one not linked to any debit card and/or ATM cards. This will make withdrawals hard to accomplish and hence the money saved in there will slowly escape your mind. It will now be sort of manipulating mental accounting to work in your favor.
Once you are in the habit of failing to give in to impulse buying, saving the extra cash goodies, and spoiling yourself only when you can afford to; just sit down, relax, and watch as your savings multiply. Your bank account balance will soon have impressive figures enough to buy as many shoes as you want and the best phones on the market.
Funny thing though, you may find that just knowing you can afford such goodies is as good as owning them and therefore forego making any purchases. This is because, in reference to buying things, financial freedom is more fulfilling. Additionally, you could look into becoming a money lender and doubling your savings. Having said that, work on this two cognitive biases and say hello to a promising bank account and a new saving compliant Singaporean you!
Saving up needs a lot of self discipline. If you need financial assistance for an emergency, do visit https://quickmoney.sg.