We all know it's important to plan ahead, especially when it comes to our finances – so why aren't we saving more? With the news that many of us aren't saving enough for retirement, we're looking at what drives people's financial behaviour, and how it can be changed for the better.
The solution to the UK's savings problem could lie in a psychological concept called "episodic foresight".
What is episodic foresight?
Episodic foresight is the ability to look beyond our current state and imagine being in a different state in the future, and therefore to plan accordingly. Research has shown that this ability develops sometime between childhood adulthood:
In a 2015 study, Caitlin Mahy invited 90 children (aged three to seven) to her lab and offered them a drink of apple juice. This was to make sure they weren't thirsty at the start.
Next she she showed them a photo of some pretzels and a glass of water and asked them which they'd prefer to have now. Nearly 80% said they'd prefer pretzels. Regardless of how they answered, all the children were offered pretzels to eat as they listened to a children's story for around six minutes.
Then, the pretzels were taken away and Mahy asked the children to imagine that they were coming back to the lab tomorrow. They were asked whether they'd prefer water or pretzels during the story. Now nearly 70% said they'd prefer water tomorrow.
Finally, the children were offered a drink of water and the question about tomorrow was repeated. Having quenched their thirst, most of them now said once again that they'd prefer pretzels tomorrow, contradicting the answer they'd given moments earlier.
The results of this study indicate that these children haven't yet developed episodic foresight; because they were thirsty when the question was asked, they thought they would prefer water to pretzels the next day.
Obviously, as adults, we are able to understand that being thirsty today doesn't mean we will be thirsty tomorrow. However, as a nation we are failing to apply episodic foresight to our finances. In other words, we can't see past our current situation, to imagine a time in the future when we'll rely on our retirement savings.
Failing to save
Earlier this month, the findings of the Momentum UK Household Financial Wellness Index revealed that an incredible 50% of people in the UK have no savings or investment products. The research also found that 26% of people (who aren't already retired) say they haven't made adequate provisions for retirement.
This is particularly worrying, given that people will be living on their retirement incomes for longer than ever. Last year we wrote about how people are generally bad at estimating how long they'll live, and this could have a huge impact on the kind of lifestyle you can expect in retirement.
What can you do to save more?
Saving for retirement means sacrificing some of your income in the short term, in return for an income later in life. If you want to save more, this means changing your priorities.
For example when you get a pay rise, you could choose to contribute the extra income to your pension rather than taking the extra cash each month. This is a good use of episodic foresight – imagining your future circumstances and taking action accordingly.
There will always be a conflict between meeting your short term living costs and saving for the future, but understanding where your money goes each month is the first step towards taking control of your finances. Once you've got a clear picture of what you're spending and where, you can see how small changes can make a big difference to your long term goals.