25/07/2016 07:34 BST | Updated 23/07/2017 06:12 BST

The Psychology of Saving - Could 'Paying Yourself First' Help?

Many of us struggle to put money aside each month - there always seem to be bills to pay, or things that we (or those in our family) want to buy. The Office of National Statistics reports that people in the UK only manage to save around 4% of their net income - a figure that has declined substantially since 2013, when it was around 10%.

However, saving money can be important - not only for our financial security (the money advice service recommends that people try to have at least three months salary in the bank for emergencies), but also for achieving longer term goals, such as making a trip abroad to visit a friend, home improvements, or ensuring sufficient funds for a happy retirement.

Although the current financial climate certainly contributes to the difficulties that people experience saving (i.e., people have less expendable income and the interest rates on savings are low), there are also likely to be psychological factors that explain why people struggle to act on their good intentions.

This is why the Institute of Inertia (a collaboration between the University of Sheffield and have been thinking about the psychology of saving. If we can identify why people struggle to save, then we may be able to shift these factors and help people to save time and money. In this blog, I want to draw your attention to two psychological factors that potentially make it difficult for people to save money.

First, evidence suggests that people are likely to be unrealistically optimistic about their ability to save. In a seminal study on what has become known as "the planning fallacy", Roger Buehler and colleagues asked undergraduate students to predict when they would submit their theses. In addition, the students were asked to forecast when they would complete the thesis "if everything went as well as it possibly could" and "if everything went as poorly as it possibly could."

Sadly for the students, over half of them took longer to complete their thesis than their most pessimistic prediction - i.e., their prediction "if everything went as poorly as it possibly could." Another study by Vered Rafaely suggests that people are also overly optimistic about their health in old age, with the consequence that they do not intend to save for long-term care. It seems that there is a double whammy then - people both underestimate their need to save money and are overly optimistic about their ability to do so.

The second psychological factor that might contribute to the relatively low rates of saving in the UK comes from research on "the empathy gap". This idea was first described by George Loewenstein and suggests that people are likely to underestimate how strong the temptation to spend (e.g., to buy new clothes, the latest consumer gadget, or even just a(nother) latte macchiato) is likely to be. The consequence is that they are unprepared for the strong feelings of desire that accompany these moments - something that no doubt contributes to their optimism about their ability to save.

Indeed, further research by Roger Buehler (this time with Johanna Peetz) finds that people underestimate their future spending, predicting that they would spend substantially less money in the coming week than they actually spent, or than they remembered spending in the previous week. These findings led the researchers to extend their work on the planning fallacy to talk about a "budget fallacy".

So, given these psychological factors that make it difficult for people to save, what strategies might help people to save money?

An article published in Forbes magazine in 2014 described the interesting hypothesis (put forward by Chad Nehring, a financial advisor in Wisconsin) that people might be encouraged to think about saving as "paying themselves first". The idea being that, when a paycheque arrives, people should pay themselves first by putting money into their savings.

The idea of paying yourself first essentially flips saving on its head - rather than saving what is left (or more likely not left) at the end of the month, saving takes priority and people are encouraged to consider the amount that it might be possible to save at the start of the month.

US motivational guru Tony Robbins suggests that people should aim for around 10% of their net income, and then "pay themselves" that amount. Coupling this strategy with a savings account from which it is difficult (or impossible) to make withdrawals might be particularly advantageous, because even when the desire to spend raises its materialistic head, structural constraints make it harder to succumb.

So that's the theory, now it's time to test it out. Will proactively paying myself first at the start of the month boost my savings, or will the temptation to spend get the better of me? There's only one way to find out... If you are giving it a go, then I'd love to hear about your experiences. Tweet me @princellewelyn with ♯instituteofinertia