Hello Ultimate Money Fighters! I had to share this particular piece from one of the finance blogs that help inspire me to save money. Ramit Sethi is the creator of I Will Teach You To Be Rich which is an excellent website for financial and also lifestyle topics. This particular article is about the Psychology that happens when money is saved in certain situations.  It is a guest blog post by the folks at DailyWorth.com which is a personal finance blog for women. Enjoy!

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The Psychology of Money: The Last Mile of Saving

By MP Dunleavey, editorial director of DailyWorth

DailyWorth is a daily email about finance (the perfect supplement to iwillteachyoutoberich) for women delivering practical tips on self worth, net worth and everything in-between.

So you’ve cut back your car insurance, negotiated a lower interest rate on your credit card—or nabbed a great deal on a new TV. You’re congratulating yourself for being a smart saver, and keeping more of your hard-earned money in your pocket.

Not so fast. You haven’t actually saved any money…until you’ve put the actual cash in the bank.

You might say, “Well, duh.” But Peter Tufano, professor of consumer finance at Harvard Business School, says that many people confuse a lowered rate (on car insurance), or getting a discount (25% off a TV) with saving money. “It’s not savings until you save it,” he says.

You Need to Turn the Numbers Into Real Cash
Sounds easy, but it’s not. Making sure that mental savings morphs into tangible cash in your account is one area where your brain isn’t your best financial friend. You can thank a psychological phenomenon that economists have dubbed malleable mental accounting.”

Mental accounting stands in contrast to real-life number-crunching. If you transfer $100 from checking to saving, for example, there are clear-cut steps you have to take, from logging onto your accounts, selecting the transfer option, filling in the fields, etc.

How Your Brain Manages Money

Your brain takes a more flexible, sometimes freewheeling approach. Imagine that you just bought a TV on sale, marked down from $900 to $800. Or let’s say that you negotiated $100 off your car insurance premium. Your brain now believes it has $100 to play with:

“Hmm, I just saved $100. Score! That means I can spend a little extra on Jack’s bachelor party next week. Or, I could sock it away into savings. Actually, I think I’ll make an extra payment toward my credit card. Of course, Jill’s birthday is coming up…”

In reality, the money you’ve “saved” on the TV or premium is still theoretical. At this stage, because of the fuzzy nature of mental accounting—and because any reduction in price or fee simply means you’re paying less, not saving more—action is required to transform this into savings.

How?

Take These Steps to Make Savings Happen

At this point you need to take three steps:

1. Decide how you want to handle the “savings”: as one-time or a recurring event.
2. Decide how much you can save and when, then set up reminders, if necessary.
3. Choose where you plan to save it, based on your goals.

Don’t Talk Yourself Out of Saving

If you saved $100 off the purchase of a TV or 25% off a pair of shoes, aim to save some or all of that gain. This may require a negotiation.

First, you might argue that you bought the item at a discount because that put it within your price range. You never would have paid full price, so you don’t have extra to save.

Nice try. Studies show that most people have a range in mind when they spend. You got the TV for $800, but you were probably willing to pay up to $850.

Let’s say you go for the big gain of $100; it’s a single purchase, so you’re going to handle it as a one-time event. How will you turn this into real savings?

The last step is to look toward your goals. You can make a transfer to a savings account (personal, emergency, wedding, travel), put it toward debt (e.g. credit card, student loan, mortgage, etc.), or add it to your retirement account.

Two Ways to Save A Recurring Amount

If you negotiate a $25 reduction in your cell phone bill, say, the process is similar.

Beware of sneaky mental accounting: It’s tempting to believe that your bill has been lowered, so now you don’t have to do anything. Left to its own devices, that $25 will sit in your checking account and GROW.

Sorry. If you’ve “saved” $25 on a monthly bill, either add that amount to your automatic savings transfers each month—or be bold and add it up for the year ($25 X 12 = $300) and transfer that lump sum toward one of your goals.

Once you’ve taken action, and the actual cash is building up, now you can sit back and congratulate yourself, maybe even brag a bit. Not only did you nail some savings, you went ahead and saved it.

DailyWorth is a daily email about finance for women (the perfect supplement to iwillteachyoutoberich) delivering practical tips on self worth, net worth and everything in-between. Sign up for DailyWorth here.

This post is part of a series on the Psychology of Money. For more articles on the psychology of money and investor psychology, follow the links below.