Like dieting and exercising, saving money is one of those things that all of us know we should be doing, but often don’t. With everyday expenses, future priorities like college and retirement savings quickly fall off the radar because they simply seem less important.
In a recent article on CNN Money, Sendhil Mullainathan, a professor of economics at Harvard University and a recipient of a MacArthur Foundation “genius” grant, calls this phenomenon “scarcity of attention.”
“Scarcity of attention prevents us from seeing what’s really important. The psychology of scarcity engrosses us in only our present needs,” he writes. “People think saving is difficult because they think it requires a heroic tightening of your budget. In reality, you can make a big dent with automation and by capitalizing on a few opportunities requiring self-control.”
It’s relatively simple to overcome your scarcity of attention. We’ve put together five steps to get you started:
1. Automate your savings.
By setting up automatic contributions to savings and investment accounts, you can literally put your savings on autopilot. Work with your bank to set up automatic transfers on a bi-weekly or monthly basis into your savings or investment accounts. Automating this process will ensure that you save on a consistent basis and aren’t tempted to spend the money on something else.
2. Track your spending.
The mere exercise of tracking your expenditures can have such an eye-opening effect that it can completely change the way you manage your money. Dedicate yourself to writing down everything you spend for one month. When you review your expenditures, you’ll be shocked at how quickly little purchases – such as lunch or coffee – can stack up. Tracking your expenditures will help you eliminate spending leaks and build savings.
3. Delay gratification.
No matter what your financial goals are, if they are worthwhile, they will require persistence and patience. To do this, you must consistently work at rejecting instant gratification in favor of delayed gratification in order to achieve each goal. So instead of going on a spending spree with your work bonus or tax refund, deposit 90 percent of the money directly into your savings account. That way, you’ll still have 10 percent to treat yourself.
4. Stop spending $5 bills.
While this may sound like a strange strategy, it’s pretty effective. Instead of saving change, start putting away every $5 bill you come across. If you stick with it, you’ll be surprised at how quickly those dollars begin to add up.
5. Use credit wisely.
To minimize interest charges associated with credit cards, make a commitment to use them prudently. Try to limit your credit card purchases to those you can afford to pay off in full at the end of each billing cycle. For larger purchases, such as cars or perhaps a vacation, work on your delayed gratification (see step #3) skills and start saving up for the purchase in advance to cut down on any interest charges.