Do You Spend Instead of Save? Here's Why – and How You Can Change It

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It's a tale as old as time – you want to save money, but just can't resist an impulse purchase in the moment even though you know it's probably not a wise financial decision.

There may be a simple reason why, and it boils down to how you feel about money, according to Eesha Sharma, an associate professor of business administration at Tuck School of Business at Dartmouth College, who studies financial behavior around consumer wellbeing and marketing.

Sharma started studying the psychology of money after the Financial Crisis, when she noticed that even millionaires sometimes felt they didn't save enough. She found that people don't base perceptions of their wealth on objective metrics, such as how much they make, but how they compare to their past states, desired finances and how they compare to peers.

"When those feelings highlight an insufficiency of resources, you can feel financially worse off," said Sharma, adding that this leads to bad financial decisions, such as spending your entire paycheck on things to feel better in the short-term while neglecting long-term goals.

Luckily, this type of thinking is something that can be changed, according to Sharma. Here are her tips for improving your relationship with money and saving, as well as the pitfalls she says consumers should watch for.

1. Connect with your future self

Something that helps people get out of the loop of short-term thinking when it comes to money is to bridge the gap between their present and future self, said Sharma.

A way people can do this is to image their life five, 10 or more years into the future and visualize what they'd like to have, she said.

She also suggests seeing savings as earnings for your future self. "A way you can think about that is pay yourself before you pay a merchant or a store," she said.

2. Find a saving method that works for you

 "Saving is not fun for a lot of people – it can feel like a loss," said Sharma, adding that there are a lot of ways to reframe this thinking to make saving enjoyable.

One trick that's helpful is to divide a large amount into smaller chunks. "If you break up savings into smaller, more manageable goals, it quadruples how much people are willing to save," said Sharma. "And, people continue with it."

Having a clear, tangible goal can also help people save. Sharma recommends breaking out savings into accounts earmarked for certain things, such as a vacation or restaurant fund.

If you're still struggling to overcome the emotional aspect of saving for the future, automating savings through a bank account or budgeting application can help alleviate some of that stress and ensure you're still putting money aside, she said.

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3. Find ways to save that don't involve cutting out all spending

It's also important for people to realize that saving doesn't have to come at the expense of all spending, according to Sharma.  

"There are so many ways to save and not all of them involve depriving yourself of consumption," she said.

People can shop for sales, use coupons for lower prices on goods and do research to find the best price for an item before making a purchase.

"The idea is to think really broadly about what those savings opportunities are," she said.

4. Earning more isn't always the solution to saving more

A pitfall that often catches people that are struggling to save is the idea that their money problems would be easily solved by a higher income.

"I think there's a misconception that earning more will contribute more to financial well-being than saving," Sharma said.

While that might be true in some cases – like those that don't earn enough to save – for many people, having more money won't automatically shift their perception and solve any issues they have around saving.

"You might most naturally think about ways to increase earnings that savings, but opportunities to earn also come with increased expenditures that is a trade off if you focus on earnings," said Sharma.

For example, given the choice between two jobs with the same net gain in income, people are more likely to choose one with a higher bonus, even if it means travel costs would increase, according to a study Sharma and co-author Punam Keller, also a professor at Dartmouth College, published in the Journal of the Association for Consumer Research.

Information changes that outcome - the study also found that once participants were told about the benefits of being able to save at a job that didn't increase expenses, they were more likely to choose the option with the lower bonus.

"Having that knowledge can be helpful for consumers to know, 'what am I most likely to be thinking about,' and 'where are my blind spots?'" she said.

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