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Saving and Pre-saving

Saving more and saving better, experience shows that not everyone understands the concept of saving furthermore, people do not know the enemy lies in your own home. The biggest obstacle to overcome to achieve your financial goals is the individual.

Humans are biologically designed to seek an immediate reward and not think long term. This pattern has been established for thousands of years and to alter away from such a embedded thought process requires great effort, determination and willpower.

In 1972 Stanford University in California conducted a research experiment that has been repeated numerous times by different researchers. The experiment was called the “marshmallow experiment”. The experiment consisted in putting a child in a room and placing a marshmallow on the table. The child could eat the marshmallow at any time, but if the child waited an additional five minutes until the researcher was back the child was able to receive an additional, doubling the reward for just a few minutes of waiting.

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The inevitable and immediate result was as expected, the majority of children took the marshmallow immediately. Only 30% waited the extra 5 minutes to receive the additional. If you think it is a childish attitude, take a moment to think about the times you have failed to maintain a diet or the times you’ve started “saving” without getting anywhere. The need for more and the need to have it as soon as possible is within human nature.

With the current hyper-consumerist culture many people will consume more than what they need and in many cases more than what they can afford. So understanding that saving can be difficult, the solution for many savers could be the concept of Pre-Saving.

What is Pre-Saving and why does it work so well?

The concept of Pre-Saving is a process to trick your mind and the trick is simple. Pre-saving consists in informing your bank to separate a portion of your paycheck every month and automatically place the funds into a separate account. The theory is if the individual does not see the potential savings money in his daily account, the temptation to spend it is not there. This is the first step to avoid spending your whole paycheck every month. Once that task is achieved, we can then start progressing into a more in depth way of saving. Savings taken from a monthly paycheck can then be placed into financial products with a binding saving purpose in order to get the best return with the lowest risk possible.

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Within our society we all buy in the same stores, wear the same clothes and listen to the same music, there is still a wide range of differences in the perception among people’s needs. People have different consumption patterns, and different scales of priorities. This is the clue to understand why it is so difficult for people to succeed in their objective to save money. No two people with the same salary will ever be able to achieve an identical savings at the end of the month. Furthermore, it probably wouldn’t even be logical to attempt to save the same amount due to particularities in their lives such as civil status, number of children, health issues, etc.

Each person must identify an individual savings goal with the most efficient amount for their lifestyle and needs, in order to maintain the equilibrium in the balance of payments with the level of income. Low salaries imply lower savings, but not necessarily in terms of percentage. If two people agree on saving $100 a month, yet one earns $1,000 a month and the other one $2,000, the evident fact is that the individual with the earnings of $1,000 a month is more efficient at saving than the second.

In conclusion, when deciding the kind of financial product to invest our savings into, we need to analyze every aspect of the investor and the adversity in order to define the financial risk that investor can have in his portfolio. If a person makes a large sum of money every month, and has a high capacity to save, then the financial advisor should look for products with a long term horizon and probably with a higher exposure to the stock markets than a small investor with a low capacity to generate money.

Investment Types Word Circle Concept with great terms such as stocks, bonds, savings and more.

Smaller investors should invest in shorter term horizon investments and with a lower exposure to the volatile markets and invest in products related to debt and bonds. Smaller investors can avoid this diversification process (due to the costs of doing it with a smaller amount of money) by choosing very safe products with a short term return. It is always very important to diversify between different types of products, as one might say “never put all the eggs in the same basket”.

This article was submitted as a guest post by Anthony Prams www.smartfinancemag.com

 

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