One of the great challenges we face and that makes it difficult for us to save money is lack of self-control. We can have great resolutions and set great goals but then when we try to “take action” we can not. In this article we will show you how behavioral economics can help you save more money.
What do we do with our money?
When we get money we have to decide what we are going to. The first reaction is to settle the accounts that have since fallen (have you ever wondered why institutions charge us the account close to the date of receipt of our salary?). Subsequently, a large percentage of families choose to leave the money in their current account to cover the expenses that are planned during the month.
We clearly see that in this organization we are not giving priority to saving but prioritizing spending. It is natural that we have to honor our commitments and gladly that this happens. However, by not giving priority to saving how do we want to save money effectively?
How do we organize our wealth?
The organization of our wealth is fundamental so that we can have greater control over our behavior and our money. Shefrin and Thaler propose a hierarchy of bank accounts with which we identify:
- Account of the day-to-day (current assets) – The account that most use and is designed to meet the current expenditure. Typically the money is on the current account and may also be applied to financial products with high liquidity as certain savings accounts (some banks pay the current account, even though the interest rate is very low).
- Savings account (current wealth) – An account whose participation is less tempting than the day to day account but still usually busy for emergencies or other expenses. A savings account that applies capital in some savings and investment products.
- Savings in the house (home equity) – It is interesting that very few people consider the payment of their mortgage loans as a form of savings. This is due to the lack of knowledge that part of the amount paid to the bank is interest and another is capital amortization. In practice, we are building forced savings, which grows every month and represents the main savings of Portuguese families.
- Retirement savings (future income) – A savings whose need is growing but still continuing without this awareness. Retirement savings accounts are stowed in a corner of our brain which often leads us to forget that we have the money saved. The savings account that we are typically very reluctant to move, even though with the crisis the redemption of the PRPs to amortization of housing loans (crisis symptom or myopia?) Has grown.
How to save more money?
The authors referenced earlier tell us of the need to move our savings to mental accounts that are less liquid. That is, if we want to save money we have to take money out of our current accounts and apply it to other accounts, with a special focus on retirement accounts.
At this stage we may be tempted to think that we can not save (it may make sense to know some strategies to save money). However, these experts tell us that in their studies the people who save for retirement do not withdraw money from their savings accounts. That is, when you put money into retirement you are increasing your savings as a whole. Perhaps because they apply more money from the current account in the long run?
What products should be included in the retirement savings account?
As time horizons are broader, it is essential to find the financial products that make the most of the benefits that exist. Thus, it is important to consider:
- Risk – The longer the time horizon the greater the risk that we must assume because it tells us the story that risk is offset by higher levels of return;
- Fiscal Efficiency – Long-term financial products are designed with great concern for fiscal efficiency. We suggest that you consult the PPR and the financial insurances whose tax rate is much lower than the rate applied on the other products.
Now just get started. The first step is to overcome inertia. Then we adapt and we achieve our goals.