Many people struggle to save money: More than half of Americans (58%) have less than $1,000 set aside, according to a survey by GoBankingRates. And our own minds can get in our way.
"Very little about the way our brains are constructed is going to help us navigate all our financial matters," says Harold Pollack, coauthor of "The Index Card: Why Personal Finance Doesn't Have to be Complicated." The University of Chicago professor is known for creating a list of core personal financial advice that fits on a 3"x5" card.
"In order to effectively manage your money, you have to methodically follow a fairly boring set of principles that have a long-term pay-off in the abstract future — and sometimes require you give up some concrete, momentary satisfaction," he says. "That's very difficult for us."
Part of our struggle comes from errors in our system of thinking, or cognitive biases, that experts say can keep us from making logical or optimal decisions. Think of them as mental traps that can keep you from saving money.
Here are three to watch out for:
"When we have an opinion, we filter all new information so as to reinforce that opinion," Jeff Kreisler, author of "Dollars and Sense: How We Misthink Money and How to Spend Smarter," told Grow earlier this year.
Say, for example, that you feel like it is practically impossible to save money. Then when you scan the news, you spot a survey about how many people aren't concerned about their lack of savings. Confirmation bias may mean you see that news as further proof that your ideas about saving are correct, which keeps you from taking steps like looking for ways to trim your expenses or setting up automatic contributions into your 401(k).
In the stock market, herding bias happens when investors buy a stock because everyone else seems to be buying it, without researching whether the stock is actually a good investment.
This tendency to follow the crowd can show up in savings behaviors, too: If your friends aren't mindful about how they spend and save money, you might feel like you don't have to be, either.
"One of the real problems young people have is that your peer group wants you to spend more money," Pollack says. Forty percent of millennials said they have gone into debt to keep up with their friends' lifestyle, according to a Credit Karma report. And although saying "no" to a group dinner everyone else is attending can result in FOMO, it could save you money in the long run.
"We all spend more time and attend more carefully to matters that are fun and entertaining," says Pollack. "We spend less time and are less careful about matters that boring, anxiety-producing, or faintly depressing. That's true of retirement savings, long-term care insurance, and other matters."
You might gush to your friends about your big promotion or the fact that you're buying a home, but it's more awkward to talk about how much money you've saved. In most social settings, it feels inappropriate. And seeing as talking about yourself is intrinsically rewarding, according to a Harvard study, doing something you cannot talk about is less appealing.
"There is no kind of social or cultural capital that comes from quietly saving," Pollack says.
Cognitive biases can sway you toward unproductive decisions, but knowing what they are can help you identify them — and avoid falling victim to them. "How do we match what's really going to motivate you in the moment, with the thing that you need to do as part of an effective long-term plan?" Pollack says. "And when you're self-aware, that's what you're thinking about."
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