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Psychology of Money: The Last Mile of Saving

What happens when we take 90% of the steps to save money...but fail the last 10%?

Ramit Sethi

image of piggy bank

A few weeks ago, while I was at a conference in DC, I was attending a panel on email marketing when someone raised their hand and asked a question about advertisers and CPM vs. CPA. If you’ve ever been to a tech conference and waited for the Q&A period, this is about when you start contemplating different ways to commit suicide, including turning the conference program into a shiv to stick in your heart. People’s questions are that bad.

But this one was good. Very good. After the panel, I walked over to meet the questioner, and I realized we’d been emailing for a year. Amanda Steinberg is the founder of Dailyworth, a newsletter targeted at women and personal finance. Yes, women and money are different than men. So it was refreshing to see someone openly acknowledging that and writing targeted material for them.

I asked Amanda and her partner, MP Dunleavey, to write up a post on how we make a large cognitive error in our savings strategy. We’ll go through the enormous cognitive process of refraining from buying something, or negotiating a fee away…and then fail the last mile.

Today, MP shows us how to complete that last mile — and lock in our savings.


* * *

The Psychology of Money: The Last Mile of Saving

By MP Dunleavey, editorial director of DailyWorth

DailyWorth is a daily email about finance (the perfect supplement to iwillteachyoutoberich) for women delivering practical tips on self worth, net worth and everything in-between.


So you’ve cut back your car insurance, negotiated a lower interest rate on your credit card—or nabbed a great deal on a new TV. You’re congratulating yourself for being a smart saver, and keeping more of your hard-earned money in your pocket.

Not so fast. You haven’t actually saved any money…until you’ve put the actual cash in the bank.

You might say, “Well, duh.” But Peter Tufano, professor of consumer finance at Harvard Business School, says that many people confuse a lowered rate (on car insurance), or getting a discount (25% off a TV) with saving money. “It’s not savings until you save it,” he says.

You Need to Turn the Numbers Into Real Cash
Sounds easy, but it’s not. Making sure that mental savings morphs into tangible cash in your account is one area where your brain isn’t your best financial friend. You can thank a psychological phenomenon that economists have dubbed malleable mental accounting.”

Mental accounting stands in contrast to real-life number-crunching. If you transfer $100 from checking to saving, for example, there are clear-cut steps you have to take, from logging onto your accounts, selecting the transfer option, filling in the fields, etc.

How Your Brain Manages Money

Your brain takes a more flexible, sometimes freewheeling approach. Imagine that you just bought a TV on sale, marked down from $900 to $800. Or let’s say that you negotiated $100 off your car insurance premium. Your brain now believes it has $100 to play with:

“Hmm, I just saved $100. Score! That means I can spend a little extra on Jack’s bachelor party next week. Or, I could sock it away into savings. Actually, I think I’ll make an extra payment toward my credit card. Of course, Jill’s birthday is coming up…”

In reality, the money you’ve “saved” on the TV or premium is still theoretical. At this stage, because of the fuzzy nature of mental accounting—and because any reduction in price or fee simply means you’re paying less, not saving more—action is required to transform this into savings.


Take These Steps to Make Savings Happen

At this point you need to take three steps:

  1. Decide how you want to handle the “savings”: as one-time or a recurring event.
  2. Decide how much you can save and when, then set up reminders, if necessary.
  3. Choose where you plan to save it, based on your goals.

Don’t Talk Yourself Out of Saving

If you saved $100 off the purchase of a TV or 25% off a pair of shoes, aim to save some or all of that gain. This may require a negotiation.

First, you might argue that you bought the item at a discount because that put it within your price range. You never would have paid full price, so you don’t have extra to save.

Nice try. Studies show that most people have a range in mind when they spend. You got the TV for $800, but you were probably willing to pay up to $850.

Let’s say you go for the big gain of $100; it’s a single purchase, so you’re going to handle it as a one-time event. How will you turn this into real savings?

The last step is to look toward your goals. You can make a transfer to a savings account (personal, emergency, wedding, travel), put it toward debt (e.g. credit card, student loan, mortgage, etc.), or add it to your retirement account.

Two Ways to Save A Recurring Amount

If you negotiate a $25 reduction in your cell phone bill, say, the process is similar.

Beware of sneaky mental accounting: It’s tempting to believe that your bill has been lowered, so now you don’t have to do anything. Left to its own devices, that $25 will sit in your checking account and GROW.

Sorry. If you’ve “saved” $25 on a monthly bill, either add that amount to your automatic savings transfers each month—or be bold and add it up for the year ($25 X 12 = $300) and transfer that lump sum toward one of your goals.

Once you’ve taken action, and the actual cash is building up, now you can sit back and congratulate yourself, maybe even brag a bit. Not only did you nail some savings, you went ahead and saved it.


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  1. avatar
    Tyler WebCPA

    You feel good when you have that “extra” $100 that you “saved,” and you can use this money for other things you want, but it isn’t getting you any closer to your financial goals. I can see this as being more appealing to my wife, who lusts after shopping around and finding deals, than it is to me. That cool though, because that plays into a strength that she has.

  2. avatar
    RJ Weiss

    I can’t remember which book it was from, (I think it was Psycho-Cybernetics but not sure) , that told the story how certain salesman thought that they were only worth a certain salary. The sales manager, noticed that his sales guys who were moving from an easy, populated area for selling to a harder, rural area to sell were making the same salary they were still making the same salary. On the other side, the guys who were moving from harder to easier, would still earn the same amount. It was almost as if, they had a set amount that they thought they were worth.

    The more I learn about about the psychology behind personal finance, the more I’m seeing that most people have a set amount of expenses that they hit each month. Even if they save, $100 on car insurance premiums, there mind tells them that they can go spend it somewhere else.

    Excellent post and looking forward to checking out some of the links.

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  4. avatar
    Single Mom Rich Mom

    The smartest thing I’ve done as I’ve made more money and decreased expenses over time has been to constantly increase my percentage savings. I don’t look at my spending from this kind of micro level anymore (I used to though). I set a total amount that I think is reasonable and just spend according to my wants. Fortunately my wants aren’t very high anymore. 🙂

  5. avatar
    Doug Warshauer

    I love this idea! It hadn’t occurred to me before, and I think it’s terrific. I would build on it by opening a specific savings account labeled “Deals.” Every time I got a deal on something I buy, I’d take the money I saved and move it that amount from my checking account to my “Deals” savings account.

    By having a separate account, I can now measure how much I’m saving by finding deals. And since I can measure it, I’m pretty sure I’m going to work harder at finding deals, so I can watch that account build up. The psychology of this is really powerful.


  6. avatar

    Agreed that you are not actually saving unless you save it, however if you purchase something that you were going to buy anyway than you have realized a savings because you’ve been able to achieve a goal sooner. It all depends on your financial goals – if it gets you there sooner or helps you achieve more of your goals then you have saved, it doesn’t have to go into a bank account or under a pillow for it to count. This logic, however, does tread close to the type of mental accounting you are warning about.

  7. avatar

    This same idea is the reason a lot of personal conservation efforts don’t do squat. Say a person buys a hybrid car now they feel they deserve to drive more or buy that extra something because they have helped the world and saved some gas. But until that money saved on less gas becomes real savings and not a new cellphone or what have you no real conservation efforts have been made.

  8. avatar

    I feel like I can avoid a lot of the mental psychology by taking myself out of the picture…I feel that’s what the point of the whole “automation of finances” piece of the puzzle is.

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  10. avatar

    I guess I can appreciate this, but I don’t necessarily agree with it.

    If I buy a hybrid car, think I’m saving gas and therefore drive more miles–I’ve gotten more miles. If I save money on shoes and in turn spend more in a restaurant–I have more food and drink.

    Purchasing more with less is good, and that shouldn’t be negated because I decided to use that money elsewhere.

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  12. avatar

    Justin, yeah I look at it the same as you… I guess it depends what a person means by “saving” – if they are “saving” for their retirement nest-egg or trying to save for some other specific item, then the advice in this article is spot-on. I look at is as if when I get a deal that means I have more to spend on something else that I need or was planning to spend on (which means that I’ll save quicker for the next item on my list, and so on). As long as you don’t waste the saved cash on frivolous/luxury items you wouldn’t otherwise buy, you will realize that savings, but the psychology of human spending seems to be that bargain = free cash (which it of course doesn’t).

  13. avatar

    Yes but if your original intention was to reduce your impact and save money then that has been negated. Purchasing more with less is good if you don’t mind be a little harder on the planet and losing what you saved. The whole point of the article is the opposite of what you feel “It’s not savings until you save it” so if using the money saved by being environmental friendly is being used for buying something else then you have lost the potentially save-able money and what ever environmental good you did in the first place. Saving money goes hand in hand with saving the environment

  14. avatar
    Vince Robisch

    Great tip! It’s easy to “save” your way into debt without realizing it.

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  18. avatar

    Savin’ ain’t savin’ til it’s in the bank.

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  21. avatar
    Benjamin Manns

    I have to disagree that you are “purchasing more with less.” If you save $10 on shoes and pay $10 extra for the 16 oz steak when you go out to eat, you are “purchasing more with equal.”

  22. avatar

    By saving $10 on the shoes it allows me to order a $18 steak (instead of the $8 burger I always budget for). Sure that’s $10 that I could have put in my savings account, but then I love steak, and rarely treat myself. Would it be considered savings if I took the $10 and put it an account made just for saving up for a steak dinner? And then withdrawing from that account to pay the bill? Or does “saving” only mean for big-ticket items, and where do you draw the line? I’m not saying its good financial advice, just that it all depends on your goal and your ability to stay on track.

  23. avatar
    Benjamin Manns

    Now that I think about it, that makes perfect sense. The point of saving money would be to redirect it from one destination to another, more valuable destination. I guess one would have to evaluate the greater value you would place on the $18 steak now that you have saved $10 – whether it’s something you truly value for the extra money, or if the “good-deal high” is the thing influencing your decision.

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  26. avatar
    Gregg Pechmann

    It’s amazing. most people, including myself, once we have that new found money….feel like we have a new freedom to spend. Most likely, we will spend more than what we just saved on…..

  27. avatar
    alex jordan

    The best way to save is to set aside a certain amount each day to save and stick to it….EVERY DAY!!! Make it the 1st thing you do. Rule of thumb is to pay yourself before you pay anybody else. 🙂

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  32. avatar

    “First, you might argue that you bought the item at a discount because that put it within your price range. You never would have paid full price, so you don’t have extra to save.”

    I don’t agree with their “nice try” response. All of my big ticket unnecessary items are bought at a discount. I would never pay full price, and I set my limit, then shop till I find the item under that limit. If I pay less, that means I’m that much closer to my next goal. I don’t think the money has to be transferred to be saved unless you can’t control yourself when you see your checking balance is a bit higher than usual.

  33. avatar

    My thoughts exactly.

  34. avatar
    U. Romilion

    I completely subscribe to your point of view, MP, regarding the need to make also the last mile of saving: you saved nothing until you’ve got the money in the bank (or where-ever you usually put it). For me this is another form of building financial self discipline and pushing yourself towards more savings. By moving more money from my checking account to my savings account, the threshold to use that money becomes higher (I really hate to take any money out of my savings account and almost never do it except for long term investments). This takes away some of the financial slack on my checking account that I tend to use more impulsively than I’d want to.

    I sort of hate to admit that I still need this kind of discipline building, but the truth is that it seems to have become even more important over the years as I have managed to build a considerable asset basis. Earlier, when I was really driven to get wealthy, it was easy to be very disciplined about saving money. Now that I’ve already achieved what I originally aspired for, I need that extra discipline to keep focused. I believe this is really necessary though: wealth makes it easy to evolve into spending habits that first seem innocent but gradually grow and grow until they really start eating into your wealth.

    Thanks again, MP, for reminding us of this last mile that helps to ensure many more miles on our journeys towards financial happiness.

  35. avatar

    Nope, I’m sorry, but you’re wrong. Saving 25% on my car insurance means I have that 25% of the money still in my account. That money is already saved in the bank, simply by not spending it on the item for which it was originally budgeted. I don’t need to move it to a savings account for that money to somehow magically exist. Moving it to another budget item where it can do more good may not always be “saving” in the sense that it’s in a “savings” account, but it’s still in my hands–I’ve saved it from my car insurance company’s hands.

    I buy my clothes at thrift stores. I don’t budget $200 for clothes, I budget $30 for clothes. If I buy a used shirt for $5, there is no way I’m going to put $20 into savings just because I would have paid $25 for that shirt brand new. First off, it’s not brand new–it’s not WORTH $25. Also, if I put $20 into savings at that point, taking it out of my clothing budget, I now don’t have the money to buy shoes I need for work. How in the world is that helping me??

    Now, you could say, “oh you don’t take it out of your clothing budget you take it out of your checking account.” My budget is based on every penny I earn. I don’t have “extra” money in my checking account, I have budgeted money that hasn’t been spent yet. Maybe I budgeted $10 for buying a shirt and found one for $5–You can bet I’m going to spend that extra $5 buying a new pack of underwear that isn’t stretched and faded, or some socks without holes in them. But I’m not going to put it into a savings account.

  36. avatar
    Kathleen Burns Kingsbury

    Yes, we do play games when it comes to how we think about money. My favorite one is when my husband says we “made money” because he got his expense check from his company. For 18 years, I have been explaining that this check covers expenses that were already incurred. But he still likes to see it as free money. I think it makes him feel good to think he is getting bonus cash. Funny how so much of how we think around money is for some sort of emotional gain.


  37. avatar

    My biggest problem with this is planning to spend my “extra” $100 5 different ways. I can get really creative with ways to spend money. I get excited, and before I know it I’ve spent $500 in my head which makes it even harder to put the actual $100 in savings. Because I’ve already found so many other things I “need.” I will also use an extra $100, to justify a $300 purchase that I can’t really afford to make. I did a lot of this “saving my way into debt” in my early 20’s. I slowly, but surely am working myself out of that mentality.

  38. avatar
    Mark Kenny

    Maybe I’m a pessimist, but I always see the “paying less, not saving more” side of things. Unless I get something really great quality for a ridiculous price, I don’t feel like I’ve saved anything — and even then I still feel like I’ve spent money rather than saved it.

    Do you think this is a good thing or a bad thing?

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  40. avatar
    Sudan Gautam

    Telling you the fact before reading this post i has just won the bargaining and thought that i had saved certain amount to spend on something else. I have been practicing this kind of saving habits from last 4-5 years. Now surely i shall practice what i have learned today. Saving is getting into action this is the most powerful statement from your post. Thank you for such a changing habit suggestion. looking for your next post.

  41. avatar

    Hey Ramit! I followed your link to the original Failure of the Last Mile article ( where you mention I went to check it out since I’ve had some of my own terrible experiences, and the site has now been turned into “everything that’s great about Best Buy.” Bummer. And the worst part is, it LIES! But where do I go to complain? Maybe I can start up my own site? Is acquiring this website a profitable move for whoever took it over, or a benefit to Best Buy? Does it quell consumer’s concerns, or merely inflame them more?

  42. avatar
    personal debt

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