The Psychology Behind A Low Savings Rate

Do you sometimes find it hard to save money, even though you want to?

You're not alone. Recent studies show that the average American only saves 5.5% of their pay. But why does this happen?

Is it just that they don't make enough money, or are there greater mental issues at play?

In this article, I'll talk about the psychological reasons why people don't save much. I'll talk about the things that affect our ability to save, the mental blocks that can stop us, and some practical ways to save more. Whether you've been saving for a long time or just started, knowing the psychology behind your savings habits can help you make better financial choices and reach your long-term goals. So, let's dive in!

Key Takeaways

  • Higher interest rates make saving more attractive, whereas low-interest rates make saving less attractive.
  • Instant gratification can hinder saving, but automating savings, visualizing goals, avoiding spending triggers, and creating a savings ritual can help overcome this barrier.
  • Financial literacy and education are essential in helping individuals save money and make sound financial decisions.
  • Setting up automatic savings can help develop a savings habit and increase savings rates.
  • Life events, such as job loss and illness, can significantly impact a family's savings rate, making it crucial for everyone to have an emergency fund to cope with unexpected expenses and preserve wealth over the long run.

Factors affecting savings rates

Interest Rates

Interest rates are one of the things that affect the rate at which people save. Higher interest rates make saving more appealing because people get a better return on their money when they put it in the bank.

On the other hand, low interest rates make it less appealing to save money because the return on savings is low.

This means that if the interest rates are too low, people may be less likely to save money.

Inflation Rates

The rate of inflation can also change the rate of savings. If the inflation rate is higher than the interest rate, putting money in a bank is a bad idea. This means that the savings will be worth less and less over time.

If the inflation rate is high, people may be less likely to save money.


Another thing that affects the savings rate is income. When income goes up, people can save more, but people with very low salaries can't afford to save. The rate of saving can also be affected by how income is shared.

Half of the drop in the overall savings rate from 1999 to 2007 was caused by the bottom third of households in terms of income growth.

This is surprising because economic theory says that when a household's income drops briefly, but not permanently, they should save less.

Economic Growth and Consumer Confidence

The savings rate can also be affected by how well the economy is doing and how confident people are. When the economy is doing well and people are confident, they tend to spend more and save less. On the other hand, when growth is slow and consumer trust is low, people tend to save more and the savings ratio goes up.

As people changed how they spent their money because of the COVID-19 outbreak, the personal saving rate went up.

But since then, the rate of personal savings has dropped to its lowest level since 2005.

Social and Cultural Influences

A person's spending habits can be affected by their social and cultural background. Research has shown that a group's saving and spending habits can be affected by its beliefs and customs. For example, in the West, saving money and spending it carefully is often seen as responsible and a sign of maturity, while spending money and living in the moment is seen as irresponsible.

Some cultures, on the other hand, may put more value on spending money on family and neighborhood events than on saving money for the future.

A person's spending habits can also be affected by the people around them. A study found that social pressure makes people in rich countries save more. This shows that people may be affected by how their friends and social networks save money.

Psychological barriers to saving money

Change Your Mindset

Having a growth attitude can help people see their money as a chance to grow and get ahead, not as a problem that will put them in debt. People who keep track of their money don't worry about looking at their accounts because they know what to expect.

Spending time thinking that one is bad with money or that no matter how hard they try, they can't save anything won't help them get better.

Because of this, it's important to change the way you think about your money.

Benefits of Saving Money

Saving money gives you a financial "backstop" for life's unknowns and makes you feel more safe and at ease. Once an emergency fund is set up, saving can also be used as "seed money" for investments with higher returns, like stocks, bonds, and mutual funds.

When people plan ahead and know what they need to do to get from where they are now to where they want to be, they feel like they are in charge of their lives, which can make them happier.

Research has shown over and over again that people are happier when they feel like they have some power over their lives.

Emotional Connection to Money

Money problems can affect a person's friends and relationships, and it can be upsetting to think about money. People might feel bad about spending money, even if they know they can afford it, or about asking for help, even if they know they need it.

It might help to keep a log of what you spend and how you feel.

Write down what you spend and why, as well as how you felt before and after.

After doing this for a while, a person can look back and see if there are any trends in how much they spend and how they feel.

Instant Gratification versus Delayed Gratification

Low spending rates can be caused in part by people who want things right away. People usually don't feel connected to their savings goals, and they put more value on their present wants than on their future wants.

Saving takes planning and more work than buying, and it also means rethinking how you do things now.

In this age of instant satisfaction, it's too easy to spend money and too hard to save it.

People often give in to the urge to spend their money and don't have enough self-control to save it.

People can avoid instant satisfaction and save money by automating their savings, imagining themselves reaching their financial goals, figuring out what makes them spend money and avoiding it, and making saving money a habit.

Studies show that routines may help people be more self-controlled.

For example, saying out loud, "This money is for my future," before putting it in a savings account could help.

People can also set up visuals and remind themselves of why they are saving in the first place to keep that emotional link to their savings goal.

Self-control and the ability to wait to get what you want are psychological forces that make people work toward goals. When people avoid getting what they want, they can get what they need without going into debt.

People can reach their long-term financial goals and have a lot more peace of mind if they delay getting what they want.

By avoiding "instant gratification" and saving for longer-term goals, people can improve their financial well-being and escape the trap of "instant gratification."

Financial literacy and education

Financial education and knowledge are very important for helping people save money and make good decisions about their money. By knowing a lot about money, people can avoid making mistakes that cost a lot of money and reach their life goals, such as saving for college or retirement, using debt wisely, and starting a business.

The Impact of Financial Education on Savings

Studies have shown that financial education can help people save more money, even if it doesn't change how well people understand money or what their deep preferences are. Financial literacy has been shown to change how people save and spend, how they handle debt, and how they borrow money.

Curriculums for financial education usually focus on saving and related topics, such as keeping fees low and learning how to manage money.

But it's not clear what effect high school financial education has on how much people save at home.

The Importance of Financial Literacy

Countries with low levels of financial knowledge tend to spend and plan their money inefficiently and borrow and pay back debt at high costs. Financial literacy affects not only how well people do financially and how much they save, but also what kinds of goods are available on financial markets.

Households that don't know much about money may help pay for financial goods for people who know more about money.

So, lawmakers need to make improving financial literacy a top priority, especially among vulnerable groups of people.

Common Misconceptions About Saving Money

People have a lot of wrong ideas about saving money that they think are true. Let's look at a few of these:

  • Myth 1: You must earn a lot of money before you can start saving. However, the truth is that you can save money regardless of how much you earn if you put your mind to it. There are many simple things you can do to reduce the amount of money you spend day-to-day, such as reducing the amount you spend on food or changing your shopping habits. The point is that everyone has different incomes and should save money depending on what they personally can afford.
  • Myth 2: Some people are just "bad" at saving money. While it's true that some people may be naturally more inclined to save, there's no such thing as being "bad" at saving money. Knowing how to save your money and evaluate your finances is a skill, just like any other. It's never too late to adopt better saving and financial planning habits, even during a pandemic.
  • Myth 3: Saving is all about deprivation. However, saving is all about spending it's just spending that you'll do in the future. By saving money each month, you are likely to have funds available in case an emergency happens. Saving money is certainly not pointless. For example, if your car was to break down or you were to have a leak in your home, the money you have saved could be a massive help to get you through the emergency.

Practical tips for increasing savings rates

Change Your Mindset

Negative thought is one of the most important mental blocks to saving money. If you think badly about money, it's best to change your mind and think more positively about it. Instead of thinking about how hard it is to save money, think about what you might be able to do when you hit your savings goals.

By thinking about the good things, you can stop thinking about the bad things and start saving.

Take Advantage of Cashback Tools

Another way to get past mental blocks is to look at your earnings and use cashback tools. This can help you figure out where you can save money by cutting back on spending. You can save money without having to make big changes to your life if you use cashback tools.

Set Up Automatic Savings

Automatic saves is a good way to get past mental blocks and get into the habit of saving. You can save money without even thinking about it if you set up automatic savings. This can help you fight the natural urge to put your current wants and needs ahead of your future ones.

Set Realistic Savings Goals

Setting a clear but attainable savings goal is another way to get more people to save. Use a tool to figure out how much you need to save each month or year to reach your goal. By making reasonable savings goals, you can get your finances in order and get into the habit of saving.

Reduce Monthly Bills

You can also save money by lowering your monthly bills and changing the way you do things every day. For example, if you keep up with maintenance jobs like replacing filters and checking tire pressure that can affect fuel economy, you can save money on your gas and electric bills.

Paying off debts with high interest rates, like credit card bills, first can also save money in the long run.

Keep Track of Expenses

To save more, it's important to keep track of your spending and make a budget. Setting a goal savings rate and making a budget based on that rate can help reach the goal. Getting a raise or making more money can also help people save more, but it's important to avoid a change in living and keep costs low.

Choose a High-Yield Savings Account

Lastly, a high-yield savings account can help you get the most out of the money you save. To find the best savings account for your needs, it's important to do study and compare different ones. By using these useful tips, you can save more money and reach your financial goals.

The Role of Frugality in Boosting Your Savings Rate

When it comes to saving money, frugality is a key factor that can make or break your success. Frugality is all about being mindful of your spending habits and making conscious choices to save money wherever possible.

It's not about being cheap or depriving yourself of the things you enjoy, but rather finding ways to live a fulfilling life while still being financially responsible.

By adopting a frugal mindset, you can start to see the value in saving money and make it a priority in your life.

This can lead to a higher savings rate, as you become more intentional with your spending and find ways to cut back on unnecessary expenses.

Whether it's cooking at home instead of eating out, shopping for deals and discounts, or finding ways to reduce your bills, frugality can help you save money and reach your financial goals.

So if you're looking to boost your savings rate, consider the role of frugality in your financial journey.

By making small changes and being mindful of your spending, you can start to see big results and build a solid foundation for your future.

For more information:

The Role of Frugality in Boosting Your Savings Rate

Life events and savings rates

Events like losing a job or getting sick can have a big effect on how much a family saves. Unexpected costs or a loss of income can throw a family's finances for a loop, which they did not plan for.

Even for people with a lot of money, these changes can cause a lot of stress.

Households need to save up in case they have to pay for these unexpected costs.

Everyone needs an emergency fund because it can help families deal with unexpected costs and keep their money in the long run.

The Impact of Life Events on Savings Rates

Personal savings rates over time show how events in people's lives affect their ability to save. From 1960 to 1985, people saved a lot, but from 1985 to 2005, they saved less and less quickly. In the last five years, from 2006 to 2011, people saved more and more regularly.

The financial disaster of 2008 also had an effect on how much people saved.

Financial Illiteracy and Savings Rates

Low savings rates can also be caused by people who don't know much about money. If you don't understand simple economic and financial ideas, you might not have the right tools to figure out how much to save and how to use your assets in retirement.

The Consequences of a Low Savings Rate

A low savings rate can hurt people and the business in the long run in a number of ways. People who don't save can get into debt, have trouble paying bills if they lose their jobs, or not be able to reach their goals.

It can also limit your financial freedom and flexibility, making it hard to move to a city with more possibilities, take professional courses or college classes, or start a business.

Also, not having savings can make it harder to make investments, which can mean you miss out on chances to grow and make money.

On a bigger scale, the economy can suffer when people don't save much. A high saves rate can make people spend less now but spend more in the future, while a low savings rate can make people spend more now but spend less in the future.

If there are no other changes to income, a rising personal savings rate can temporarily slow economic activity, while a falling personal savings rate can temporarily speed up economic growth as people spend more of their pay on goods and services.

But in the long run, if people don't save much, they may not invest, which can slow down economic growth and progress.

Why Saving is Important

  • Life events such as job loss and illness can impact savings rates by creating unexpected expenses or lost income.
  • An emergency fund is essential for everyone to have to cope with unexpected expenses and preserve wealth over the long run.
  • Financial illiteracy can contribute to low saving rates.
  • A low savings rate can lead to debt, financial hardship, and not being able to achieve aspirations.
  • A low savings rate can limit financial freedom and flexibility, making it difficult to move to a city with more opportunities or start a business.
  • A low savings rate can limit investment opportunities, which can lead to missed opportunities for growth and wealth accumulation.
  • A low savings rate can lead to slower economic growth and development.
  • It is important for individuals and policymakers to prioritize saving and investment to ensure long-term financial stability and growth.

Final reflections and implications

In conclusion, there is a lot going on in a person's mind that makes them not save much money. How much we save depends on things like how much money we make, how much we spend, and how well we understand money.

But it's usually our own minds that get in the way of us meeting our savings goals.

Our feelings and ideas about money can make it hard for us to save.

Fear, worry, and not being able to control yourself can all make it hard to save money.

But if we know about these mental blocks and work to get past them, we can take control of our money and start saving more.

To increase our savings rates, we also need to learn more about money and get more schooling.

By learning about budgeting, investing, and other financial topics, we can make better choices about our money and build a solid financial foundation for the future.

Last, things that happen in our lives can have a big effect on how much we save.

Whether it's a job loss, a medical emergency, or a big buy, unexpected costs can ruin even the best savings plans.

But if we're ready and have a good emergency fund, we can stay on track with our savings goals and weather these storms.

In the end, the best way to save more is to understand the emotional and practical factors that affect our financial choices.

We can build a better financial future for ourselves and our families if we look at our finances as a whole and work to get past our mental blocks.

So let's start saving money right away and put it to work for us.

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How Much of Your Paycheck Should You Save? (With Data)

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Links and references

  1. The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel
  2. Article from the American Psychological Association on saving towards aligned goals
  3. Article from Seacoast Bank on setting and tracking small milestones for saving
  4. Trainer's manual from the International Labour Organization on saving effectively.

My article on the topic:

How to Improve Your Savings Rate and Achieve Financial Security

10 Ways to Increase Your Savings Rate

The Importance of Tracking Your Savings Rate

How to Calculate Your Savings Rate

The Benefits of a High Savings Rate

Savings Rate versus Investment Returns: Which is More Important?

Savings Rate Strategies for Different Income Levels

The Role of Frugality in Boosting Your Savings Rate

Savings Rate Mistakes to Avoid

How to Stay Motivated to Maintain a High Savings Rate

Personal reminder: (Article status: rough)

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