(Click here to learn how to save for a rainy day.)

When we understand our responses to money, we can put measures in place to help us make the right decisions.

Over the last few years a new science has developed called behavioural finance that aims to understand why people react the way they do to money.

Behavioural psychologist Merle Friedman of the PeoplesTree Group says research has shown that there are three main reasons why people do not save: too much choice, a preference for maintaining the status quo and an inability to delay gratification.

1. Too much choice makes decisions hard

   When people are faced with too many choices they find it difficult to make a decision. Economists and companies have always assumed that the more information and choice we have, the better decisions we will make. However, the opposite is often true. There is only so much information our brain can process before it effectively shuts down and we cannot make a decision.

   Are South African investors simply faced with too much choice, considering the diverse range of investment products out there, from endowments to retirement annuities to unit linked investments? Even within one investment category such as unit trusts, there are over 800 investments to choose from. While people may want to save, the choice may be so overwhelming that it is difficult for them to even know where to begin and spending the money becomes the easiest choice.

2. It's hard to change our saving habits

   Having so much choice establishes what Friedman calls the status quo bias or adopting the default position. It is easier to keep on doing what you are doing than to make a change. The effort of making a choice, filling in forms and dealing with the administration of an investment means we are less likely to do so. Regulations like FICA which require even more paper work can also discourage saving. Financial advisers can help their clients to overcome this inertia and make a positive change towards saving.

3. We struggle to delay gratification

   Most people struggle to delay gratification. Friedman says focus groups have shown that when people are asked if they would like to receive R2000 today or R2500 in a year’s time, they will choose the smaller amount immediately. This is because most people struggle to visualise what their future looks like. They can see immediately what they would do with the R2000 today, but do not have a clear picture of what R2500 will mean to them in the future.

   Financial advisers play a key role in explaining the benefits of delaying consumption. By maintaining a relationship with their clients, they can reinforce these benefits during the client’s financial journey.

www.libertylife.co.za

44 ways to make more cash It's not easy to make extra money, but it can be done if you're creative. Here's how...

What will you regret? Advice to a reader who wants to know if he should accept the promotion he's been offered...

How to ditch all debt Do you have credit card debt? Do you want to pay off your home loan more quickly?