Set your goal ... and go for it

Building up a decent household kitty can bring peace of mind as well as financial rewards

Across the nation something scary is happening to household savings. They’re dwindling. These days, our savings ratio has fallen to 3.2%, meaning for every $100 we pocket after tax we’re saving just $3.20. It’s not enough to fund more than a few Freddo Frogs, yet just three years ago we were saving three times this amount. In the 1970s, Australians were tucking away more than 20% of household income.

The fact is we’ve lost our savings mojo. To find out why, we look at research commissioned by ING, putting Australia’s savings habits under the spotlight to see what drives us to save, what we’re doing well – and where we’re going wrong – as well as talking to experts to understand the brain barriers that hold us back from saving.

The good news first. ING found that 70% of Australians have savings goals they’re working towards and about the same proportion have a savings plan in place to set money aside on a regular basis.

Building a pool of emergency money is the big driver for saving, and while the average level of savings that would make us happy is a lofty $350,000, plenty of Australians have far more modest targets, with one in five saying they’d be happy to have just $10,000 in the kitty.

On the downside, one in four Aussie adults do not have a regular savings plan in place, preferring a hitand-miss approach of saving when they’ve got some spare cash (and, let’s face it, who has spare cash?). Even among those who do have a savings plan, only one in four actually achieve their savings goals.

Guido Swinkels, ING Australia’s savings product manager, is not surprised by these findings. “It’s recently been reported in the news that two-thirds of Australian households could not easily raise $3000 for an emergency, and one in four Australian households have less than $1000 in savings,” he says. “This really highlights

why it’s so crucial to find a savings account that will help you to get ahead.”

Why it’s so hard

Sure, we can all face practical barriers to saving. Two out of five Australians, for instance, say they have copped a larger-than-expected bill.

But it’s often simply the case that saving draws the short straw in our money management. ING’s study found that one in three of us admits to spending up big on unplanned purchases such as a holiday or new car. One in five confesses to being an impulse buyer and 24% blame having kids for sabotaging their plans.

The thing is, lots of people are successful savers – and no, they’re not just the high income earners. As a guide, close to 30% of both high and low income earners say they’re able to tuck away savings every fortnight.

Beat the brain barriers

When it comes to saving, our brain isn’t always our best friend. Economists and

psychologists have long recognised the behavioural science issues that can hold us back from saving. Seen through this lens, the hurdles to building a nest egg of cash become a lot clearer.

Shane Oliver, chief economist and head of investment strategy at AMP Capital, says one of the main stumbling blocks is “present bias”. That’s our tendency to value things we can enjoy today more highly than those we have to wait for. This bias can be overcome if the future payoff is good enough but right now that’s not the case.

“Interest earned on savings is the compensation for giving up current consumption, and today’s savings accounts are paying low returns,” he says. “So while present bias is always a phenomenon, it can be accentuated in a low-rate environment.”

Claudia Hammond, UK-based psychologist, agrees that “our minds are always going to prioritise the present over the future”. But she believes there is another aspect to the savings dilemma.

“The vast majority of people believe that in the future they will earn more, become better at saving and better at spending less. If you’re lucky and your career and the economy go well, then maybe you will earn more in the future, but unless you make a deliberate change there’s no reason why you should automatically get better at saving instead of spending. It’s much more likely that if your income rises your tastes for the finer things in life will gradually rise too.”

A further pressure to put spending ahead of saving comes down to what Oliver calls “crowd psychology”, which works like peer pressure. “We see people around us with lots of possessions and gadgets and we want to enjoy the same things,” he says.

There are ways to overcome these behavioural traps. “You can try tricking yourself,” says Hammond. “If you’re considering when you need to save for your old age, work out how many days it is until you retire. Research has shown that 3652 days feels shorter than 10 years, so it might make you save faster.”

Another strategy is to put your savings in an online account with a name that makes it sound far away. “If your money feels geographically distant, you’re less likely to dip into it.”

A bit of self-analysis doesn’t go astray either. “If you’ve found saving difficult until now, it’s no good just deciding to turn over a new leaf. You need to look back at why you found it hard to save before.”

Ultimately, Oliver believes overcoming psychological hurdles can come down to “thinking about what we really want from life. How much does the pleasure of current consumption outweigh the reassurance of having savings to cope with possible future emergencies?”

The joy of saving

Oliver could be onto something. Studies show it’s the anticipation rather than making a purchase that gives our brains a boost of the feel-good chemical dopamine. This leads to so-called “shopper’s high” though the effect lasts only a short time and is often followed by regret or “buyer’s remorse”. The flipside, according to Hammond, is that having rainy day savings can be very reassuring. “It can reduce the anxiety that things might go wrong and leave people freer to make the decisions that will make them happiest. Some people leave more than they need to in savings accounts, rather than investing it. This can leave financial planners in despair because you might well be getting a low interest rate but this doesn’t take into account the psychological benefits of having savings.” Sign up to our eight-week challenge for practical tips to beat the brain barriers and ignite your savings strategy.

Beware the honeymoon trap

Even when we actively follow a savings plan, there are stumbling blocks to avoid. ING found a remarkable one in two Australians has signed up for a savings account with a special introductory offer. But despite an eye-catching honeymoon rate, these accounts can end up costing savers dearly.

“The average end-of-honeymoon interest rate drop, recalled by the research respondents, was about 2%,” says ING’s Swinkels. “So if you don’t do anything when the honeymoon rate ends, you could be missing out on better returns.”

It turns out that plenty of savers are being caught out this way. Among those who’ve used this type of savings account, 13% weren’t aware the interest rate was only for a limited time (rising to one in five millennials) and 12% didn’t really think about how long it lasted because it was such a good rate. Not surprisingly, the miserly revert rate has left plenty of savers disappointed.

“The stats suggest that more than one in 10 Australian adults is not reading the fine print when it comes to putting their hard-earned savings in an account,” says Swinkels. It’s a reminder to be aware of exactly what you’re signing up for, more so because, despite the letdown, most savers with a honeymoon rate savings account do nothing to earn a better return once the introductory rate ends.

Just as worrying, 33% of Australians say they have been penalised for withdrawing money from a savings account. “We do know that people are getting penalised for more than just withdrawing money,” says Swinkels. “In some instances, they are getting penalised with rate reductions if they don’t comply with the need to deposit a regular amount.”

The key is to do your research, read the fine print and if something doesn’t make sense question it. The bottom line? Always make sure your savings account is helping you to achieve your savings goal.

‘ The shopper’s high is short-lived and is often followed by buyer’s remorse