A key building block in personal finance is a savings plan yet few of us seem to have one. Instead, we have rising credit card debt.
To turn things around in 2014 it may be necessary to change how you think about saving money. Australian researchers have found that taking a cyclical approach to saving, instead of the typical linear, goal-oriented approach, may be more effective at encouraging short-term savings.
“Americans seem to understand and believe in the importance of having an emergency fund, back-up savings, or simply ‘money in the bank’ — and yet, savings rates are still low,” said Leona Tam, psychological scientist at the University of Wollongong in New South Wales, Australia. “Our research suggests a new, alternative method to personal savings that we hope will help to bridge this gap.”
Setting abstract goals, says Tam, may not get you where you want to be. She says people who think about savings in linear terms may be overly optimistic, assuming they can always save more down the road.
A cyclical mindset, on the other hand, focuses on the series of interconnected recurring experiences that crop up on a regular basis. A cyclical mindset, the researchers say, should make people less likely to put off saving money by encouraging them to make concrete plans and decreasing overly optimistic thinking about the future.
The findings are based on a study using 145 subjects. One group was left to save money with the traditional, linear approach. The second group was instructed in the cyclical approach. The researchers said people in the cyclical mindset group were able to save more, at least in part, because they developed more concrete plans and were less optimistic about future money-making in comparison to their linear-thinking counterparts.
Just do it
Regardless of how you think about saving, the important thing is to start doing it, say personal finance experts. And no matter how you approach it, saving is not possible without either increasing your income or spending less than you are now. For many would-be savers, that's the problem.
If a raise or second job isn't in your future you'll have to find ways to cut back on current expenses, and most people don't like that idea. However, it might not be as unpleasant as you think.
Cameron Huddleston, a contributing editor at Kiplinger's, recently added up the savings from a few simple steps. Most people can save, she says, by reducing telecommunications charges.
“You need to evaluate whether you really need that landline,” Huddleston said. “Are you using it enough to justify the expense? You could be saving $30 to $40 a month if you can get by with just your cell phone.”
There may also be ways to save on your cellphone plan. For example, how much of your monthly data allotment do you really use. By accessing your account records you can check you usage over the last few months. If you are paying for more data than you really need, you could drop down to a smaller monthly allotment.
Another area where consumers can save is by reviewing their insurance coverage. Premiums are affected by the policy's deductible – the amount a driver or homeowner pays on a claim. By raising the deductible – and assuming more of the risk – the consumer pays a smaller premium.
“I saved by doing this myself,” Huddleston said. “I shaved about $300 off my annual premium by boosting my deductible from $1,000 to $2,000. That's a savings of about $25 a month. You can also do the same thing with your auto insurance. It's also a good idea to do this, especially with homeowner's insurance, because you don't want to be tempted to file small claims, which will just lead to increased premiums.”
Getting real about money
Honestly assessing your financial performance can be another way to get a handle on savings. The first step is to track where the money is going. People sometime avoid doing this because they fear the reality of their spending will force them to make unpleasant changes. However, knowing where money is spent puts a person in control, allowing them to spend mindfully instead of mindlessly.
Adding up your total debt is another unpleasant task, but one you need to do before you can launch an effective savings plan. Once all debt is totaled, review the interest rates for each obligation. Next, total the dollar amount of interest paid each month, and consider how that money could be used if it weren't going to service debt.
As you begin to face reality you'll become more aware of seemingly innocent habits that are creating a money drain. Looking back at a month's spending through the lens of hindsight can add a new perspective to future.