Reducing spending in three common budget categories may significantly boost your ability to save money. In addition, a small mental trick could help you stick to an ongoing savings plan.
Those are the findings of two studies investigating the spending habits of better savers and the psychology of saving.
Here is how to apply these habits to your own budget.
Move from a "low" saver to a "middle" saver
Research conducted by the Employee Benefit Research Institute and JP Morgan Asset Management, which was published in June 2020, sought to determine why some adults save more than others, even when they have the same salaries.
For long-term employees, across age groups, the study showed that high savers save about 3 per cent more than middle savers. And middle savers save about 3 per cent more than low savers. Here is how the researchers defined low, middle and high savers:
- Low savers save about 2 per cent to 3 per cent of their salary.
- Middle savers save about 5 per cent to 6 per cent of their salary.
- High savers save about 9 per cent of their salary, and more as they grow older.
The difference is not a matter of income
It is often believed that low savers save less because they simply do not earn enough. However, in this study, middle savers and low savers have “very similar, if not the same salaries”, says Katherine Roy, chief retirement strategist for JP Morgan Funds and one of six authors of the study.
“So, they are earning the same, but it seems like the middle savers somehow are able to save 3 per cent more than the low savers,” says Ms Roy.
And that 3 per cent boost in savings “is huge”, she says. It could explain why the retirement plan balances of employees who are middle savers are about twice as large as those of employees who are low savers.
Better savers spend less money in three categories
Where did low savers spend more of their money than middle savers? Three categories of expenditures, as a percentage of salary, rose to the top:
- Housing, including a mortgage or rent, taxes, utilities and home services and furnishings.
- Food and beverages, including eating out and groceries.
- Transport, including the purchase of vehicles, fuel, train tickets and so forth.
A high cost of living, such as having a home in New York or San Francisco, did not seem to be a factor in why low savers were spending more in these categories than middle savers, Ms Roy says.
Travel was the only category where middle savers spent slightly more than low savers.
In every other category, the two groups spent very similarly. “That would include entertainment, apparel, education, charitable contributions, gifts – those types of things,” she says.
How to gain a savings advantage
Considering your spending over a lifetime in these three categories can improve your ability to save, says Ms Roy.
In housing expenses, look for so-called subscription creep, where you have added several recurring automatic payment services that are drafted from your current account each month. Streaming services are a frequent culprit here and can add up.
It is likely that you saved quite a bit in 2020 on expenses related to dining out and travel due to Covid-19 restrictions. Ms Roy says spending in these areas, which was typical before the pandemic but has been on hiatus, could help bolster savings long after.
Use a mental trick to form a new savings habit
Once you have adjusted your spending and can dedicate more to savings, you might want to use a mental trick to form a new savings habit.
Hal Hershfield, associate professor at the UCLA Anderson School of Management, was one of three researchers in a study published in the Marketing Science journal in November.
The findings may help you set up a recurring savings plan, where money is automatically moved to a savings or investment account on a regular basis.
“We asked some people if they wanted to save $150 a month,” says Mr Hershfield. “We asked another group of people if they wanted to save $35 a week. And we asked a third group if they wanted to save $5 a day.”
The result: Four times more people were likely to save money when the dollar amounts were presented as daily goals, rather than monthly ones.
“People think about the types of sacrifices they can afford to give up,” says Mr Hershfield, and “five bucks a day feels a little easier”.
When a savings plan was framed as $150 a month, higher-income people were three times more likely than lower-income savers to participate. But when presented as $5 a day, there was no difference in participation between the two income groups.
The simple psychological shift seemed to close the savings gap between high-income and low-income savers.