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Pandemic? Time to Save Money!

I've read mutliple articles in the past weeks from (Dutch) newspapers and financial journals indicating that saving has gone up. After years and decades of (over)consuming, Despite the interest rate being just as shit, if not worse, than before. Hmmm... According to the CPB (Centraal Plan Bureau), which collects loads of data within the Netherlands, the already "tight" Dutch saved 3.2% of their disposible income in 2019. For 2020, the expected percentage is 11.1%. Talk about an increase! The Nederlandsche Bank (the Dutch Bank) calculates these quota slightly differently and had a savings quote of 2.8% for 2019, and is predicting that in 2020 the Dutch will save 8.9% of their disposible income. Regardless of what formula you adhere to (I don't know what either are based on), savings has gone up in these dire times. Given that there's been loss of income, loss of jobs and the general worsening of the personal financial situtation of many, what's going on here?


Now obviously, I'm a behavioural scientist, so I have a behavioural scientific explanation for this. But before we dive into an exclusively behavioural science focused approach, let's keep it 100 and just be realistic about the situation: it's not that difficult to save if you can't spend your money. That's effectively step 2. Step 1 is money actually (still) coming in. If you can satisfy these two steps, savings are pretty much guaranteed! Sure, loads of bill payments (rent/mortgage, insurance, electricity) continue to flow out of your bank account and it hurts. Especially if you're paying for subscriptions you currently can't use (gym, anyone?). But a lot of the additional stuff such as going out to eat/drink, getting hair/nails/facials done, real-life shopping sprees, gas (for the car) or public transport, tickets for events or exhibits etc. and other general impulse buys suddenly are a lot more difficult. Especially the first two categories burn a hole in my budget. But if restaurants and hairdressers aren't open, what are you going to spend your money on? A lot people have now tried to recreate "luxury" at home. But even then, fancy cooking is cheaper than eating out. And of course, I shouldn't forget to mention that some money spending activities can easily be moved online. Online shopping has been booming. I'm sure many a person has bought exercise equipment, some new gadgets and maybe an ergonomic chair now that we're working from home. But even if the initial expense sets you back a bit, in the longer-term, this is actually cheaper. Congratulations, you have saved money. Leaving all practical reasons aside, let's dive into the behavioural science of it all!


Even if we did not lose our jobs, or (parts of) our income, we know people who did. The damage is visible. No one was safe. Even if we haven't lost our job or income yet, the future isn't exactly looking rosy either. Companies that haven't immediately gone bankrupt are most definitely still weathering the storm. If cuts haven't happenend yet, they might happen later. There is lots of uncertainty. Guess what the brain doesn't like?


I'm not saying we're like a computer. We're not exactly programmed to think in decision-trees: "If this..., then that. If that... then this. Else, do this" and infinite loop that whilst you're at it. But we're not that far off either. We can come up with scenarios of what might and what might not happen, and our reactions to those events. And one of these events effectively burned on our cornea is the possibility of losing our income. What do you do in such a situation? It's like the squirrel and the winter. Once late summer/autumn hits, it's time to prepare. Although seasonally we might be in summer, economically we are in mid-autumn: it's time to collect and bury our nuts. Which is exactly what we're doing. We are preparing for a winter like we've never seen a winter before. For those that still remember the 2008 crisis (remember in an economic sense), well, it's back. It might be different, and when looking beyond economic consequences, worse, but it's another economic crisis. And if you can save your money, with the help of extenuating circumstances, I suggest you do...


System 1 is scared to death. Losing income often means losing livelihood. Losing your job means losing your income and losing your livelihood. If you lose your job now, it's going to be a very long and difficult process to get a new one. System 2 knows all of this as well. Our systems, often pitted against each other, are alligned. How's that for a behavioural scientific breakthrough? Although governments keep pleading for people to "go back to their normal spending" to get the economy out of its slump, there's very little incentive to do so. Why? Well, the governments haven't exactly helped us out either. The monetary injections promised were often insufficient to pay the most basic bills. Companies went bankrupt regardless. Jobs were lost regardless. I don't remember anyone in the government receiving a paycut or losing their jobs...

Let's look at this from a public goods game: all of us need to invest our own money to get the economy back out of its slump, which is good for all of us. So the best strategy is to just invest as much as you can. Sure, granted.

But we know what often happens in these scenarios: free-riding. Knowing the risk of free-riding exists, are you going to stick out your neck and risk your livelihood, so that someone else can profit of your contributions, but contributes nothing themselves? Will you allow someone to have their cake and eat it too, by stealing your damn cake? Yeah, me neither.

This is a pretty typical damned-if-you-don't-damned-if-you-do situation. It's not nice, but it does motivate looking out for yourself, your family and your overall financial situation. You need to make sure you're good first. And that comes with saving your money, providing a nest egg, and riding this wave of pure madness out. There's a very good argument to make for saving your money, and as a result, the saving rate going up.


And even if you don't agree with this reasoning, I'll inject some learning from experience as well: when push came to shove, we've seen that banks and big companies get bailed out. Individuals suffered. So who's going to help us? We are going to help ourselves.


Behavioural Science

Personal Finance



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