The 3 Psychological Switches That Will Transform You From Spender to Saver
Have you ever felt like you’re killing yourself just to get by?
You might be working hard, even doing a good job, and quite conscious of money, but still struggling to get ahead.
Well, you’re probably not alone. Research by Perpetual Funds Management shows that only 28% of Aussies manage to save outside of their super.
That means about 72% of us are living day to day.
Most of us think the solution is simple, earn more. The pluckiest ask for a pay rise, others look for a higher paying job, a few even invest the time to upgrade their skills.
But what if none of these approaches guarantees the problem will go away?
What if earning more might actually make things worse?
As with most money-orientated issues, things aren’t what they seem. The truth is that your ability to get ahead has very little to do with your income, and everything to do with how you use it.
That might sound a little cliché, but that’s the curse of cliché’s — they are too often ignored.
Today I want to dig a little deeper, and get to the revealing truth.
Specifically, we’ll look at three simple psychological concepts the 28% who save know and use, that the rest don’t. The first is flow, the second is friction, and the third is abstraction.
In this podcast, we’ll see how the right configuration of these three switches enables these people to get ahead while enjoying spending their money more, and thinking about it less.
Let’s take a look at the first concept; ‘flow’.
Flow: The Way to Win Your Freedom
Imagine you had a bucket which was constantly catching a stream of water from a hose. This bucket has a number of holes in the bottom and the sides.
It follows that the more holes, and the bigger they are, the more water you will need to keep the bucket full, right?
Ok, so what would happen when the volume of water pouring into the bucket at any one time, exceeds the volume being leaked through the holes?
Obviously, it would mean that you now had a surplus of water spilling over the sides, wouldn’t it? Stay with me.
Let’s say water was a precious resource, what would you do? You’d probably create some kind of secondary catchment mechanism to collect the surplus, wouldn’t you?
Saving money works in much the same way as the flow of water in this example.
The way water moves from the hose to your bucket is much the same as the way money flows from your source, or sources of income (your career) to your bank account (your bucket).
The holes in your bucket are the things you spend money on. Some of those things are necessities (such as food, rent, bills, utilities etc), these holes can’t really be plugged, but they can be reinforced or reduced.
Other things (such as subscriptions, fashion items, and entertainment) are luxuries. Many of these holes can be plugged completely, and others can be reduced without any impact on wellbeing.
Your efforts to control the outflow, will dictate whether or not you end up with a surplus you can save.
The amount you can save dictates your level of security, and influences how focused you can be on your work.
Your security level dictates your appetite for risk in pursuit of your long term goals.
Think about it, if you had a healthy cash cushion that could sustain you for at least six to twelve months, would you continue to tolerate a bad boss just to make money? I doubt it.
When you save money, you buy time.
When you buy time, you gain freedom.
Despite the amazing impact good money management can have on our lives, most people still don’t understand it. One of the major reasons for this is that they fail to grasp the concept of flow.
As a result, most people associate money with feelings of helplessness and control, instead of agency and freedom.
Many work harder to earn more, but inevitably shoot themselves in the foot through a fundamental failing to manage money’s flow.
If inflow (income) increases, outflow (spending) eventually matches it. This means they don’t get ahead, and continue to be controlled by circumstance.
Worse, when we earn more; we are also able to access more credit.
This just exacerbates the flow problem because now we are able to spend progressively bigger sums of money we don’t actually have. This leads many to ruin.
Just take a tour around Bondi in Sydney or Toorak in Melbourne to understand what I mean. Believe it or not, many if not most of those with the big houses, the boats, and the beamers are just higher paid versions of the 72%. They’re not getting ahead, they’re treading water.
Remember, this is just another slice of the population. This means the majority of them aren’t saving. In fact, thanks to their spending and lending, more than a few are drowning.
It’s a little like dealing with the debilitating effects of heart disease for years, receiving miracle surgery that restores your function, and then paying less attention to your health and nutrition.
Despite your new lease on life, your unhealthy habits remain, and deep down you know it’s going to come back to bite you — in a big way.
This is why many who earn high incomes and appear to have all the trappings to prove it, are actually way more stressed about money than most.
The key to successful saving is to understand and control of the flow of your money, and this done by overcoming our instincts.
This is where our next concept; ‘friction’ comes into play.
Friction: A Tool to Automate Success
Friction is anything that makes something more difficult.
To understand friction, think about how much easier it is to purchase something with your card using pay pass than it used to be.
In the past, we had to remember which account was linked to the card we were using, and then remember a pin number. Then we had to key it in hoping no one would see, and move fast while others waited.
That’s friction.
When Pay pass came along, it obliterated most of the friction involved in using cards to make everyday purchases. Now we just ‘tap and go’.
The difference between the 28% who save, and everyone else, has a lot to do with how they use friction to control the flow of money.
See friction can be good, if it makes it harder for me to engage in acts of self-sabotage.
For example, maybe it’s better for me not write down or memorise the passcode for a savings account, since that would make it harder to access. I’d have to call my bank and wait on hold listening to crappy music or worse; some repeated commitment to ‘service excellence’.
That’s friction working for me.
Maybe I could go one step further and ensure my savings account is not linked to a card at all. This means I am almost unable to use that money on an impulse purchase.
That’s friction working for me.
But, friction can also be bad, if it makes it harder to do the things that will lead to my success.
For example, it’s much less likely I’ll save if I rely on my memory and willpower to login and transfer money each month to a separate account for savings. In this case, friction is preventing the right behaviour.
It would be much better to reduce friction by setting up an automatic transfer to my savings account. Better again to ensure it happens right after I get payed.
Better still, I could ask my employer to split my pay before it even gets to me.
This is how the 28% overcome their instincts and control the flow of money. They make friction work for them. They use it to consciously design a decision architecture that surrounds the way they interact with money.
It’s a bit like building a mental maze that continually nudges you toward the right options, and away from the wrong ones.
High friction makes us slow down, stop or turn around when about to run into danger.
Low friction allows us to think less, and put good decisions on autopilot.
Controlling the flow of money is just about understanding which holes you can plug, which you can reinforce, and which you can reduce to ensure you always have a surplus of savings. Friction is the most effective tool for controlling flow.
Sure, it might take a little work to set this stuff up at first. However, the net effort you’ll spend in one afternoon to do so is minute when compared to a lifetime of having to scrutinise every purchase.
This is one reason why the 28% enjoy spending much more than most, they set things up in way that ensures the money they can access most readily, is money marked for spending. Everything else is either automated, or regulated.
This means they never have to think about whether spending their money is the ‘right thing’, they know in advance, and at every turn. Ultimately these efforts actually resolve guilt associated with spending.
Don’t get the wrong idea thought, this doesn’t necessarily mean they don’t think about their spending at all. Actually, in some ways they pay more attention to the way they transact, and how it impacts their money flow.
This brings us to our final concept; abstraction.
Abstraction: A Trend to Watch Closely
Abstraction is anything that distances you from what is really going on.
To understand how abstraction influences us in the realm of money, think about how much more readily you’ll spend money using Apple Pay than your debit card.
We still associate cards with money, but we don’t associate phones with money. So, when we spend money using our phones, it doesn’t seem as real.
For the most part, abstraction is dangerous, because it puts you on autopilot and enables you to do things you wouldn’t normally dream of.
The more abstracted you are from the reality of what you’re doing, the more likely you’ll lie, cheat, steal, kill, and spend.
Abstraction is how white-collar criminals commit fraud, and steal huge sums of money.
Abstraction is how millions of Jews were killed using gas chambers in Nazi Germany.
Abstraction is how people spend 250 million each quarter playing candy crush saga.
As dangerous as abstraction is, it is also extremely alluring. Why? Because usually it makes our life easier in some way. How? By decreasing friction and increasing distance at the same time.
This allows us to completely delude ourselves and do things we regret.
As the world becomes more and more digital and technological, things tend toward abstraction. This can be a good thing for speed and efficiency, but also creates new dangers when it comes to managing money.
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The less concrete things seem, the easier it is to overlook their real-world impact. In order to counteract the tempting aspects of abstraction, we need to be hyper vigilant.
This is where the 28% have a built-in advantage/defence mechanism against abstraction.
Because they have understood flow and used friction to automate and regulate their spending, the 28% have something most people don’t — bandwidth.
Their early efforts allow them to retain an extra level of awareness around their spending. Because they’re not having to consider what to spend their money on, they are more likely to consider the impact of how they’re spending money.
While most people automatically assume that the latest, newest payment method will make their life better, the 28% are more cautious and conscious.
Ultimately this may mean they adopt new tech more slowly, however it also means they leak less money because they avoid making more trivial transactions using new tech.
This might not seem that important, but think about how a more considered approach to this aspect of managing money over the course of a lifetime can change the ultimate outcome.
It’s like comparing a bucket with ever changing number of holes, to one that rarely changes at all. It might be a little rustier, but you can guarantee it always provides a predictable surplus.
Stop Spending and Start Saving.
Getting ahead is more about insight than it is income.
Understanding the triumvirate of flow, friction and abstraction is ultimately what separates the saver from the spender. To become one of the 28%, reload and re-listen this podcast, and put these ideas into practice.
Of course, this will require a little effort and concentration in the beginning, but think of like pushing a train down a slope that leads you to the promised land. You just need to overcome the initial inertia, and soon enough you’ll be sailing effortlessly toward success.
