{"id":1938,"date":"2017-11-06T13:41:39","date_gmt":"2017-11-06T13:41:39","guid":{"rendered":"\/blog\/?p=1938"},"modified":"2024-02-14T08:51:04","modified_gmt":"2024-02-14T08:51:04","slug":"science-behind-savings","status":"publish","type":"post","link":"https:\/\/www.lemonade.com\/blog\/science-behind-savings\/","title":{"rendered":"The Science Behind Why It\u2019s So Hard to Save"},"content":{"rendered":"

We\u2019ve all been there. That moment you wake up and can\u2019t believe how much money you spent last night with your friends. Or when you check your bank account statement and can\u2019t fathom how the numbers got so low. <\/span><\/p>\n

We\u2019re all told time and time again that it\u2019s important to save up for the future, yet our behavior just doesn\u2019t seem to match our future selves<\/a>. What gives? <\/span><\/p>\n

First off, know you\u2019re not alone. A majority of the US population saves between 0%-5% of their income every month, which is a pretty big departure from the suggested 15%. (CNN Money) <\/span><\/p>\n

Most of us get our paychecks and immediately spend them, whether it\u2019s on apartment rent<\/a>, student loan payments<\/a>, utilities, getting an insurance policy<\/a>, groceries, or boozy nights out. Sound familiar? <\/span><\/p>\n

Since this behavior is so widespread, and, quite frankly, irresponsible, there\u2019s gotta be an explanation. <\/span><\/p>\n

The science behind our spending habits<\/strong><\/h3>\n

Perhaps it\u2019s that we\u2019re generally bad at understanding our finances. But according to science, the problem lies elsewhere. <\/span><\/p>\n

Studies show<\/span> that poor financial choices are associated with high levels of in-the-moment-living. (American Psychological Association) And the strongest predictor of smart financial decisions is not our level of financial literacy – it\u2019s how often we stop to think about the future. <\/span><\/p>\n

Not convinced? Consider this: people who speak certain languages are better at saving money than others. Yeah, you read right. <\/span><\/p>\n

Those who speak languages that use the same verb conjugation for present and future tenses are among the world\u2019s biggest money savers, such as the Chinese and Germans. Since they speak about the present and the future the same way, they\u2019ve trained their brains to think about them similarly, which makes it easier for them to save money for the future in the present time, <\/span>according to behavioral economist<\/span> Keith Chen<\/span><\/a>.<\/span><\/p>\n

\"Saving<\/p>\n

On the other hand, people who speak languages that use separate verbs for the present and future are much worse at saving money, such as the Americans and Brits. Since the future feels more separate from the present, it\u2019s harder to think about them similarly. <\/span><\/p>\n

It\u2019s no coincidence that Americans and British are some of the worst savers on the planet. <\/span><\/p>\n

So there we have it. It\u2019s hard for us to save up because we tend to value the \u2018now\u2019 over the \u2018later.\u2019 In behavioral economics speak, this is called \u2018present bias.\u2019<\/span><\/p>\n

Why it\u2019s so hard to think about the future<\/strong> <\/span><\/h3>\n

But when you think about it, it\u2019s weird that it\u2019s difficult for us to behave in ways that will benefit ourselves in the future. After all, our future selves are just as much \u2018us\u2019 as our current selves. <\/span><\/p>\n

Why is it so hard for our brains to understand that? <\/span><\/p>\n

According to science, our mind thinks about our future selves in the same way it thinks about complete strangers. <\/span><\/p>\n

Here\u2019s what happens: When we think about ourselves, a region of the brain called the medial prefrontal cortex – or MPFC – lights up. When we think about other people, activity in this region powers down. And when we think about someone we have absolutely nothing in common with, it activates even less. <\/span><\/p>\n

Here\u2019s the kicker: the further out in time we try to imagine our own lives, the less activation we show in our MPFC, <\/span>according to<\/span> fMRI studies. (ResearchGate)<\/span>\u00a0<\/span><\/p>\n

In other words, our brains act as if our future self is someone we don\u2019t know very well, and, quite frankly, someone we don\u2019t care about very much. <\/span><\/p>\n

This makes intuitive sense, notes <\/span>Emily Pronin<\/span><\/a>, a psychologist at Princeton University. One of the defining differences between the way we think about ourselves and the way we think about someone else is how we\u2019re able to experience our own thoughts and emotions versus someone else\u2019s. She explains:<\/span><\/p>\n

\u201cWe experience our own [thoughts and emotions] internally, whereas, for other people, we only know what their thoughts or emotions <\/span>might<\/span><\/i> be. So the future self – and in that same way, the past self – are more like another person than they are like the self because we can\u2019t experience the feelings of a past and future self like we can with the present self.\u201d<\/span><\/p><\/blockquote>\n

So what can we do about this?<\/strong> <\/span><\/h3>\n

To get better at saving for the future, we\u2019ll have to trick our minds into sympathizing with our future selves. If we teach ourselves to experience the thoughts and emotions of ourselves in the future, can we make better financial decisions? <\/span><\/p>\n

That\u2019s right, according to science.<\/span><\/p>\n

In a clever psychological study, a group of college students<\/a> was shown images of their own faces that were digitally altered to appear 50 years older. A second group of students was shown images of themselves that were unchanged. <\/span><\/p>\n

Those who\u2019d seen a glimpse of their future selves said they would allocate about 30% more money on average to their 401(K) than the students who were shown pictures of their current selves. <\/span><\/p>\n

\u201cSo the lesson from that is anything that we can do that will increase how concrete and salient our future self is – that\u2019s the type of thing that can help us make better decisions,\u201d said <\/span>Magnus Herschfield<\/span><\/a>, the pioneer of this study. <\/span><\/p>\n

How can we do that ourselves? For one, we can use the <\/span>AgingBooth<\/span> app, which lets you instantly \u2018age\u2019 ourselves by adding some wrinkles and grey hair to a recent image. Perhaps, like the research subjects above, doing so will make us more motivated to save money for our future selves, because we\u2019ll be able to better empathize with ourselves. <\/span><\/p>\n

Alternatively, <\/span>Stanford University Professor<\/span> Jane McGonigal<\/span><\/a> suggests<\/span> making a list of things you\u2019re interested in – such as food, travel, cars, insurance, AI etc. At least once a week, do a google search for \u201cthe future of __\u201d (one of the things on your list). Read an article, listen to a podcast, watch a video – and get some ideas of what the future of something you love might look like.<\/span><\/p>\n

A final way to get better at prioritizing our future self is to make it our default option. \u201cThe lesson from behavioral economics is that people only save if it\u2019s automatic,\u201d <\/span>said behavioral economist and Nobel Prize winner<\/span> Richard Thaler<\/span><\/a>.<\/span> \u201cIf you want to help people accomplish some goal, make it easy.\u201d<\/span><\/p>\n

Lemonade\u2019s own Chief Behavioral Officer<\/a>, Dan Ariely, agrees:<\/span><\/p>\n

\u201cWe should just take [15, 20, or 25% of our salary] out of our paycheck directly, automatically, without paying attention. Put it into a different account, don\u2019t think about it.\u201d<\/span><\/p><\/blockquote>\n