This Is the Reason You Can’t Stick to a Savings Plan

Why We Choose Impulse Buys Over Long-Term Goals

Saving money is hard for any of us, especially when we have so many competing priorities stealing our attention, and impulse buys are just a click away.

Saving is like exercising; we all have great intentions, but we struggle to stay the course of our well-made plans for the long run.

One of the reasons we can’t stay focused on our financial goals is that most people struggle to align their long-term goals with our short-term actions.

Read to the end of this post to learn how a fancy term called “hyperbolic discounting” can help you understand why it feels so hard to stick to a savings plan — -and, more importantly, what you can do about it.

What is Hyperbolic Discounting?

Hyperbolic discounting refers to the phenomenon where people prefer immediate rewards over long-term rewards. In other words, they tend to prioritize instant rewards, even if it means sacrificing larger rewards in the future. This can have significant impacts on our savings behavior, as we may prioritize immediate consumption over long-term savings.

How Hyperbolic Discounting Affects Our Saving Choices

From here on, I will replace the term “hyperbolic discounting” with “short-term thinking” because I hate using jargon.

A 2001 paper published in the Journal of Economic Perspectives studied how people with short-term thinking managed their money. Their findings reinforce a lot of the concepts I have written about in Making of a Millionaire.

First, they found that people with short-term thinking hold the majority of their wealth in illiquid assets like their homes or retirement accounts. Why do they do this? Because it’s harder to access, which means it’s harder to spend. Illiquid assets help protect short-term thinkers from impulse buys.

If you want to learn more about how illiquid assets help high-income earners with poor savings habits fall ass-backward into wealth, read this article:

In my book “The Investor’s Mindset,” I describe saving as a form of time travel — taking money today and giving it to your future self. Taking on debt means taking money from your future self and giving it to your present self.

Saving, investing, and debt are simply tools to balance out your spending throughout your life or what economists would call “consumption smoothing.”

The more you think in the short term, the more you will take from your future self to give to your present self.

The problem is that when we rack up credit card debt, we have no idea what our future income will be. We take on the debt because it’s available to us without thinking about the consequences.

Studies have found that the average consumer spends more money when credit card companies increase the amount they’re allowed to borrow. The reason? People believe that if they’ve been given a higher credit limit, they must be going to earn a lot more money in the future. However, credit card companies have no idea what our future income will be, and they don’t care. They increase credit limits based on our credit history and ability to manage credit, not our future earning potential.

I’ve written about this “sneaky” tactic credit card companies use to get you to overspend in detail here:

If your actions are dictated by short-term desires, it becomes nearly impossible to stick with long-term plans that require you to sacrifice those desires.

This builds on a continued theme I have been writing about which is that financial behavior is more important than financial literacy. A more useful way of framing that is that financial behavior must be included in the definition of financial literacy.

Tips for Overcoming the Tendency for Instant Gratification and Saving More

While the phenomenon of hyperbolic discounting can make saving more difficult, there are several tips you can use to overcome the tendency for instant gratification and prioritize long-term savings:

1. Set Specific Goals: Setting specific and measurable goals can help you stay motivated and focused on your long-term savings. An unspecific goal is “I want an emergency fund.” A specific goal is “I want a $6,000 emergency goal set up 1 year from today, and to accomplish that goal, I need to save $500 per month.”
2. Automate Your Savings: Automating your savings can help you avoid the temptation to spend money that should be going toward your long-term goals. Consider setting up automatic transfers from your checking account to your savings account each month. This way, you won’t have to think about it, and the money will be put towards your savings goals automatically.
3. Create a Budget & Track your Spending: A budget is a written document of your financial priorities. By tracking your expenses, you can identify areas where you may be overspending and redirect those funds toward your long-term savings.
4. Max out retirement accounts: As mentioned earlier, people with short-term preferences are more likely to hold their wealth in illiquid forms, like retirement accounts. Investing in an illiquid asset can help protect your wealth from impulsive consumption and provide a long-term investment that can appreciate in value over time.
5. Avoid Credit Card Debt: If you track you have a budget, track your spending, and automate your savings and investing plan, one of the only things that can wreck your plan is wracking up credit card debt. You need to be vigilant about paying your credit card balance in full each month.

Wrap up

Understanding how we tend to prioritize immediate rewards over long-term goals is key to making better financial decisions. To build a strong financial foundation, we can set specific savings goals, automate our savings, create a budget, invest in assets that can’t be easily converted to cash, and avoid credit card debt.

Saving money can be tough, but with the right mindset and strategies, we can prioritize it and achieve our financial goals. Stay focused on your long-term goals and take steps to overcome the temptation to spend on things that bring immediate satisfaction.

Start today! Take the first step towards financial freedom by setting a specific savings goal and sticking to it. Remember, every little bit helps, and over time, your small savings will grow into a significant nest egg that will provide you with financial security for your future self.

What is a specific savings goal you want to create, and what is standing in your way of achieving that goal? Let me know in the comments, and let’s talk about it.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.