Less Money, More Problems: The Surprising Reason its Hard to Save Money

By Markets Fool.com


They look stressed because theyarestressed. Source: Wikimedia Commons.

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Did you know that poor farmers are worse at weeding their fields than wealthier farmers, and that poor patients are worse at remembering to take their medications than richer ones?

Is this proof that poverty is a matter of merit? Far from it.

In fact, psychological research shows that being poor in and of itself has palpable effects on our decision-making. These stress responses not only make it harder to focus on other issues, like weeds or medications, they make it harder to make the kinds of financial decisions that can make us richer.

The cycle of scarcity
How does it work? To give you an example, Princeton and Harvard researchers Eldar Shafir and Sendhil Mullainathan conducted a study on sugar cane farmers in India. They found that the same farmers performed differently on intelligence tests before and after the harvest. When financial stresses were at their highest -- just before harvest season -- the farmers scored the equivalent of 10 IQ points lower than they did just two months later, when their wallets were fuller.

How does it work? Shafir and Mullainathan discovered that it was the feeling of scarcity. Feeling like there was a shortage of money (a smaller suitcase) consumed a lot of the farmers' mental energy, and because they directed so much attention to that there was less to go around.

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The researchers liken it to the size of your suitcase when you go on a trip. If you have a large suitcase, it's easy to fit everything in with room to spare -- so your decisions about what to take don't matter as much. With a smaller suitcase, however, every piece of clothing counts. You have to make very good decisions about what to take with you. For the average person, that careful decision-making gets very tiring, especially when it's compounded with other scarcities and pressures.

In other words, financial pressure can lead to worse decisions all around simply because the pressure takes up so much of your mental capacity. And oddly enough, the very fact of not having enough makes it harder for us to problem-solve our way out of the situation -- not because we can't, but simply because we're under strain and running low on mental bandwidth.

Overcoming scarcity
In an interview with the American Psychological Association, Shafir recommends cutting yourself some slack to counteract the effects of scarcity.

When you're already under a lot of strain and scheduled or budgeted down to the dollar, the slightest unexpected shock leaves you vulnerable to stress -- and thus worse decision-making. He says, "When you pack your life too tightly and don't leave slack, the slightest unexpected event leaves you stuck."

To save more -- difficult as it might feel right now -- just pick one area to tackle. It might be a biggish project, like seeing if you can save money on your car or home insurance, or a small one, like skimming $20 off your grocery budget. Just do one thing to start, then make sure to automatically deposit the amount you save into a savings account. Once that's working, you can try something else, like carpooling or bringing lunch to work.

Next, keep in mind that creating slack isn't just about money. You can also apply this concept to time. Shafir points out that building even a little bit of free time into your day can help you to cope with unexpected demands in the same way that building a bit of free money into your budget can. That's because scarcity of time affects you the same way that scarcity of money does, meaning that having a little "savings account" for it can help you reduce stress in exactly the same way.

Just do one thing at a time and don't stress yourself out. Enjoy the little victories wherever you create them. And pat yourself on the back: Every step you take to build a savings cusion will lighten your load -- and help you to cope with life to the very best of your abilities.

The article Less Money, More Problems: The Surprising Reason its Hard to Save Money originally appeared on Fool.com.

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