Today the phrase “life without money is like the air without oxygen” becomes more valid than ever. Money determines a person’s behavior and outlook, making it possible for one to feel self-sufficient and independent. At the same time, one of the greatest inventions of mankind has become the most mundane thing that everyone has to face every day. However, as it turned out, not every person with a hundred-dollar bill in his or her pocket can sensibly assess its cost and make a rational decision: to spend it or to save “for a rainy day.” The question “to buy or not to buy?” exists from the beginning of the era and is still one of the intractable dilemmas of a modern man. Without a doubt, everyone was standing in a store, buying something, and asking themselves about the value of future acquisitions: whether a product will bring as much fun as now in a few weeks later? Maybe, it would be better to save this money and spend it later for something more important? The problem of the ability to save for the Americans, as well as for the citizens of other countries of the world, is extremely relevant. Saving more will not only increase the level of income of the population, but will also raise the level of the economy of the whole country. After all, if the income of everyone increases, naturally, the total income of the population will also increase.
Teaching Americans to spend less has become a field of study of a new branch of economics – behavioral economics. The behavioral economics has one main goal: to teach the whole nation to think rationally to avoid the influence of the corporation sharks. There exist a few theories on how to make Americans save more and as a result to improve the economic situation in the USA. Some ideas about how Americans can be encouraged to save money are presented by such economists as Dan Ariely, Jon Elster and Greg Mankiw. They claim that it is needed to learn how to save from different sides, starting from the economic aspect and ending with the behavioral aspect of the economy.
Dan Ariely professor of psychology and behavioral economics at Duke University and a bestselling author of Predictably Irrational came to the conclusion that for most people, saving money is not just difficult, but rather impossible (2008). To his mind, this happens primarily due to the fact that people are not predisposed to perceiving reality through the prism of the long-term prospects. All human actions are based on the desire to meet their needs in real time, with the thoughts of the possible consequences subconsciously blocked or not occurring at all. It is very difficult to find a person whose actions would be based on the principles of long-term benefits.
If to imagine that somebody has a choice: to get a half –box of chocolate in a minute or an entire box in a week, the answer will be easy to define. After thinking a bit, weighing all the pros and cons, most people will prefer the opportunity to enjoy the delicacies immediately, as opposed to waiting for a week. The same thing happens with the money: a person spends all their salary immediately and forgets that he or she needs some money for the rest of the month. Next, let us fast forward the situation to the year ahead and imagine the same question: a half-box of chocolate in a year or an entire box in a year and one week? For sure, the biggest part of people will answer something like this: “If I waited a year to get a half-box of chocolate, I can wait a week and I will get the whole box”. This decision seems easy to make, because it is possible to see the results of waiting. Usually, this rule works with money too. It is much more pleasant to get much more than you expected, even if you need to wait more.
The second reason that explains why it is so hard to save money is the abstraction of money. Everyone has to keep in mind one rule, said by a writer Sophia Amoruso: “Money looks better in the bank than on your feet” (2015). However, each time when a person does shop at a store, comes to a restaurant or goes to a movie theater, they think narrowly. Nobody ever thinks how many liters of milk could be bought for the price of one bottle of red wine while sitting at a table in a restaurant. Thus, one of the most powerful psychological barriers is the complexity of human perception of the opportunity cost of money.
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These two reasons turn saving money into a complicated and impracticable process. From the perspective of a rational approach to economy, the solution to this problem would be to teach people how to properly evaluate the “price-benefit”, find all the necessary information about goods and so on. However, there is no guarantee that this method will work. After all, if everything was done according to the principles of the traditional economy, the problem with saving would not arise. According to the theory of Dan Ariely about the irrationality of human behavior, the best way to save more is to change the environment, so that a person does not participate in the process of saving. It sounds a bit mysterious, but actually everything is quite simple. This theory gives a few rules, which everyone has to keep in mind.
The first secret is in the automatic payments systems. Ideally, the person at the end of each working month estimates the amount of money still unspent and puts them on their saving account. However, as one has already discovered, there is always a risk to stay without the savings at all in this case. An accumulative pension expense (opt-out plan) may be an alternative way to deduct a certain amount of money (usually 3%) of one’s salary. Its advantage lies in the fact that the savings will be accumulated without any action taken by the person, and a quite difficult process of eliminating deductions will keep a person in the system. Indeed, this system really works and is easy to understand. Another popular method of saving for Americans are so-called Christmas clubs. It is an informal system of saving in a team, where anyone can make a certain amount each month, without the right of withdrawal before the end of the year. With this system, everyone can achieve a greater control over their desires, and as a result earn more cash.
The second secret of saving lies in the principle, which is called “pain of paying”, developed by Jon Elster (2009). The essence of this method is to see how people would feel after spending a certain amount of money. It is necessary to provide an example to understand this theory better. Imagine that somebody has two options to pay for a cruise in the Mediterranean Sea: 6 months before the beginning of the cruise, or after swimming. At first glance, it seems more reasonable to make payment of the second embodiment. However, if to think about how he or she will feel in the last day of the trip, knowing that tomorrow their wallet will be much thinner, this decision sounds not so attractive. For this reason, Dan Ariely developed and presented several methods of controlling the pain of paying. Each of them is quite simple and at the same time effective. From the point of view of economy, it is appropriate to use preventative methods for excessive costs occurrence. They include paying with cash (so one feels the “melting” of money) and receiving notifications from the bank account (this will help to keep accurate records of all expenses). The point is to make everyone save money without even thinking about it (Ariely, 2008).
Today’s economy has gone far beyond its traditional boundaries. According to the definition proposed by Greg Mankiw in his newly released textbook, “economy – it’s just the interaction of groups of people in the course of their life“ (Mankiw, 2007). This implies that the economy is no longer limited solely to the production, distribution and consumption of material goods; its action extends to the interaction of people and the principles that guide decision-making.
Greg Mankiw has his own view on the problem of how to make Americans save more money. One of the most important principles, according to Mankiw, is that “people respond to incentives” (Mankiw, 2007). This statement seems quite simple, but it influences the economy of the whole country. Mankiw wasn’t the first scientist to understand that. Indeed, discussions of financial incentives are so prevalent in today’s economy that they even included in the definition of the discipline. Some of modern economists support Mankiw and his claim that incentives are the cornerstone of modern life. There is even a joke that the economy is, in fact, engaged in the study of incentives.
Another reason why people are not ready to save more is that people are choosing how much to consume, do not look at the current income and the “permanent income”, and are unaware that spending everything today may not be the best strategy and that are planning not only for themselves, but for their children and grandchildren.
Greg Mankiw singled out several other rules of economy. For example, in his blog, he said that rationally-minded people should not be only focused on one thing, constantly thinking about what is beyond it and what to expect next. This means that if a person is not going to think about what will happen tomorrow, it is likely that this “tomorrow” will be worse than “today”. The following rule is that a person needs to compromise even with their own wishes. For example, a person can not buy the latest model of iPhone 6s, but can buy iPhone 5s and in addition an iPods bargain. No one forbids one additional gadget. However, the most important rule to keep in mind is: “Everything has a cost. There is no free lunch. There is always a trade-off.” (Mankiw, 2007) To save means to stop buying junk; thus, it is best to settle for the rule “less is more”. As long as people will remember this, the country will not be affected by any crisis.
The accumulation of money has ceased to be an exercise on willpower. This, however, is also a good thing, because the world is full of temptations of spending money, despite the objective to save more. The problem of saving has existed for a long time and the resulting income inequality has been studied as well. Even in the midst of the crisis, many countries seek to change salaries, pensions, scholarships, though often prices rise along with wages. Thus, the only solution that would lead to the common well-being is to teach people how to spend their money reasonably. Even 50 dollars could be spent in different ways. The main goal here is to understand not what a person can afford, but what he or she can do without.
The problem is, surprisingly, in philosophy. Economists can easily tell how to reach the intended target most effectively, but science does not help in the selection of the target. A new direction, behavioral economy, seeks to clarify this issue and find ways to impact the population. There are many approaches; one just needs to adhere to the rules, and then economic stability is guaranteed. The representatives of behavioral economics, who were listed above, are united in their thoughts that saving affects economy not only at the micro level, but also at the macro level. There are many ways to save more, from the banal existence of willpower (not to buy everything in the shops), to special programs developed by the banks (transferring the money left on a card to another account at the end of the month). Thus, it is real to learn how to save for the common man, not an economist; the only thing that is necessary is to understand that saving is really important because it helps to increase revenues in the future.
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