Americans like to spend. Unfortunately, 70% of Americans admit to bad spending habits, leading them to overspend by nearly $7,500 per year. Unless we change our spending habits and learn how to save, we will soon be facing a full blown retirement crisis. The Center for Retirement Research at Boston College estimates that about half of working-age households are “at risk” when it comes to their retirements. This means they will not have the savings they need to retire comfortably.
What’s the solution to the problem? Education or awareness isn’t the primary issue. A whopping 80% of those surveyed believed they were fully capable of improving their spending habits. The psychological aspect of money is a key driver in spending beyond one’s means. While there is no quick fix, this simple psychological tip can help you reach your financial goals faster.
Simple change in thinking
When we think of retirement, it seems far away. The further away the goal, the less urgent it seems. As a result, it becomes difficult for us to stay on track, especially when short-term wants pop up.
Researchers Neil A. Lewis Jr, from the University of Michigan, and Daphna Oyserman, from the University of Southern California, published in Psychological Science an easier way to stay focused on your goals.
When we think of reaching our goals in years, it seems far off and we tend to believe we have plenty of time to make up for it. But by looking at our deadline in smaller units of time, the research found that we are better able to mentally stay on track. Instead of thinking of time one year away, it is better to think of it as 365 days away.
Time metrics affect our plans for action
The researchers “primed participants with either one of two time metrics for three randomly assigned scenarios. Participants filled in the blank for when they should start saving, cued by units of either days or years to match the scenario given. For example, they were asked to say when they would start saving for college that started in either 18 years or in 6,570 days, for retirement starting in 30 years or in 10,950 days, or for retirement starting in 40 years or in 14,600 days.”
When the participants thought in terms of days, they planned to start saving money four times sooner than those who used years. Why is this? Psychologically, when we use the smaller unit, the time seems closer. The study found that “events seemed an average of 29.7 days sooner when considered in days instead of months and an average of 8.7 months sooner when considered in months instead of years.”
Even though the actual time to meet our goals doesn’t change, the researchers found that we feel more connected to our future selves when using smaller units of time. This makes it easier for us to forego current rewards (spending) for future rewards (saving). So investing for the future doesn’t seem as big a sacrifice.
The best part about this is that this simple change doesn’t require willpower or having to learn anything new. It is about changing your perspective to help you reach your financial goals. Thinking of retiring in 25 years? Think of it as 9,125 days. Want to save for a down payment for a house in 3 years? See it as 1,095 days. Framing it in this manner can help future events seem closer and more urgent.