My finances, my projects, my life
March 30, 2023

Five behavioural tips on intelligent ways to save money

Money problems are a fact of life that we rarely see coming – sudden job loss, unforeseen large expenses, a massive drop in purchasing power. When something like this happens, as well as experiencing surprise, we are often at a loss as to how to cope. Don’t panic! myLIFE can help guide you out of the red and get your head back above water with its behavioural first aid kit.

Serious money problems often leave us overwhelmed and unable to know where to start with getting our finances back in shape. Paralysed by our ancestral fear of loss (loss aversion), we tend to stand by and watch as the financial chasm expands inexorably, taking no action other than to feel sorry for ourselves. This attitude can be very damaging. From a behavioural perspective, such reactions are normal and easily explained. On the other hand, they are not easily overcome.

If you’re experiencing this type of situation, there’s good news and bad news. The good news is that there are things you can do to cope better with such times. The bad news is that you will need to be clear-headed in order to recognise the reality of your situation, rational to properly identify the required action, and willing to stop procrastinating. Your aim is to make a sensible reduction to your expenditure and to re-balance your budget on the basis of your new situation. For this, you will need the behavioural first aid kit to help get you out of the red without becoming mired in complete austerity and depression. There are five behavioural finance remedies to apply to your ailing finances.

The first step is to draw up an honest and realistic list of your expenditure in recent months.

1. Draw up a list of your expenditure

Once the first wave of panic has passed, pull yourself together and take the time to draw up an honest and realistic list of your expenditure in recent months. Then compare this list to your new financial situation to accurately assess the real shortfall in your budget. Once this is done, identify the items of expenditure that you can cut or reduce without a marked deterioration in your quality of life.

Tip: focus on expenditure for things or activities that you haven’t really enjoyed for a while. You should also identify all automatic direct debits that you no longer pay attention to. As an example, you may find a subscription to a gym that you now barely use. The main thing is to identify what you can cut or reduce, starting with the least painful options!

2. Make targeted rather than across-the-board cuts

Is your expenditure broken down into categories? This is the tricky moment where you need to make intelligent choices. Be careful not to make the classic mistake of trying to reduce your expenditure across all budget categories.

Of course, when our income rises, we tend to raise our standard of living across all budget categories. There’s nothing wrong with that providing you watch out for lifestyle inflation!  On the other hand, it’s a bad idea to reduce expenditure across the board when you have to reduce your lifestyle.

Reducing everything at once is too much. It’s a better idea to target your efforts.

For one simple reason: our loss aversion makes it too difficult psychologically. Ceasing all purchases for everything you enjoy will be far too painful. You will soon be tempted to compensate for this suffering by once more raising your outgoings across the board. Reducing everything at once is too much. It’s a better idea to target your efforts.

Tip: behavioural economists advise choosing at most one or two expenditure categories where you believe you can make reductions, and then to stick to them. One large cut is better than many small cuts. Making cuts to just a limited number of expenditure items will be less painful and you will have more chance of sticking to them over the long term.

3. Don’t take things on face value

On budget issues, it isn’t (always) small cuts that make the difference. I’m sure you’ve read somewhere, including on myLIFE, that it’s easy to make savings by, for example, cutting out the coffee you buy each morning on your way to the office. That’s true as long it isn’t the final straw for you.

Behavioural finance experts are well aware of the limits of our self-control. They claim that it’s a very bad idea to try to cut down your outgoings on food or your favourite morning coffee when you are already having to make cuts to your lifestyle. They believe that you must think very carefully before cutting expenditure on things that may be among the last little treats that you can afford at the moment. This is for two reasons.

Firstly, because if you cut out these treats, you remind yourself on a daily basis that your standard of living has fallen, and this will place your loss aversion under severe strain. It’s extremely difficult to stick to a decision over the long term if it involves the painful sacrifice of your day-to-day well-being.

The second reason for avoiding such cuts is the intense effort they require on a daily basis. You will be tempted daily and forced to make small mental calculations to decide whether or not you can afford this small outgoing. It’s too exhausting! It’s a safe bet you won’t stick to such a straitjacket for long, which will in any case only have a minimal impact on reducing your overdraft but will weigh heavily on your morale.

Instead of such very visible small ticket items that don’t have a big impact, there will often be much less visible items that have a far greater impact on your budget. These are what you should focus on.

Most of the items with the biggest impact on your budget are those that we refer to as invisible and that we no longer notice.

Most of the items with the biggest impact on your budget are those that we refer to as invisible. Overwhelmed by the fear of being unable to get your account back in the black, your brain looks for obvious solutions and often forgets to properly consider the full range of your expenditure. Such invisible expenditure relates to all automatic direct debits from your account: car and home insurance, phone subscriptions, energy bills, loan repayments or standing orders to a savings account or a charity.

Do you really need expensive comprehensive insurance when your car is already several years old? You’ll generally be able to make more savings by reviewing your insurance policies than by giving up your daily cup of coffee. You can also review your internet and phone contracts. You could also think about rescheduling your loan repayments over a longer period. This last item won’t reduce your overall debt (on the contrary!) but it may help reduce your monthly outgoings enough to get you through this difficult period.

Tip: Focus on targeted reductions to major expenditure items rather than trying to just chase and systematically cut back on small daily outgoings.

There’s no time like the present when it comes to starting to find a way out a crisis!

4. Seize the day!

Once you’re clear in your mind about what cuts to make, don’t waste any more time. There’s no time like the present when it comes to starting to find a way out a crisis! Waiting will only makes thing worse and exacerbate your fears for the future. The longer you wait, the more pressure you will be under to avoid anything that will undermine your standard of living too much, and you will lose more money and increase the risk of over-indebtedness.

This is the same mechanism as that which pushes investors witnessing a continuous fall in the value of their investments to wait in the hope of a recovery. It’s better to adopt the attitude of experienced professionals who are capable of selling and taking a loss today rather than risking an even bigger loss tomorrow.

Tip: Real issues are rarely resolved without energetic and, preferably, rapid action on your part.

5. Take back control of the time element

If you suddenly lose a substantial amount of income, the situation will tend to get worse for a while before it stabilises. This is because we all use deferred payment methods such as credit cards. Sometimes we have a variety of payment methods for settlement at different dates in the future. This means that on top of your income being in the doldrums, not all of your outgoings have yet been taken into account. The state of your finances is worse than your bank account suggests.

To get out of this situation, you must take back control of the time element. First of all, by studying all ongoing payments. Next, by accepting that you will have to cut back on spending for a while. And lastly, by paring back your payment methods.

Put your credit cards on one side for the moment, to avoid creating the illusion of money you no longer have.

Tip: The best way to gain a real overview of your financial situation is to use just one direct debit card or, if necessary, to withdraw cash when you need it. That way you can avoid the temptation of a non-essential purchase on the pretext that it will not have to be paid for until later. Put you credit cards on one side for the moment – they create the illusion of resources that you no longer have.

It’s never easy to deal with money problems or a loss of income but you must keep a clear head to properly analyse your personal situation. It may be tempted to avoid action due to the (often unconscious) fear of the pain caused by a substantial drop in living standards. But acting swiftly with the support of these five tips should enable you to get your head back above water without having to give up all of life’s little pleasures. It’s important to keep your spirits up if you are to recover from such a situation!