How to Save Smarter in Today's Economy

In today's economy, most individuals are finding it a rough-go at trying to put away money for their saving accounts. Everyone is affected in some way by the downturn in the economy and the worried individual is finding it even harder to save with less money coming in. How can we be smarter savers and at the same time start building up our savings account?

Americans have become terrible savers. A 2007 study claims that the average person puts aside 60 cents of every $100 earned, or roughly .6% of their paychecks. With the current economic downturn, more people are starting to sock away more money but it is only up to 4% of their take home pay.

This is better that the .6% statistic but not nearly as good as the statistics for the 1980's. In the 1980's, most individuals were putting away at least 10% of their paychecks. Why was it so easy to save that amount then and why is it so hard for us to save now? Behavioral economist who research a mix of psychology and economics have uncovered three reason why it is so difficult for us to save our money.

The number one reason it is hard to save money is TEMPTATION. The second discovered reason is LACK OF UNDERSTANDING. Finally, the third reason we just can't seem to save money is OPTIMISM.

Temptation is a major problem for those trying to save their money. Although we often regret it later, it just seems that most of us can't resist spending . In hind-sight, most of us have purchased something and later wished we would have just waited or not made the purchase at all.

Buying items when we really don't need them is a downfall for everyone. We all do it at some point or another and temptation is a major obstacle in our savings plan. This is also called "living above your means" as my father use to say. If you ddon't really need it...DO NOT BUY IT. Stop and think before you purchase that next big item.

Temptation can be countered if you make savings just as much fun as spending. Most of us are saying this is just not possible. How can saving money be fun? Use your imagination.

Neuroeconomist have found that imagining future purchases is almost as good as getting it. One example given is when we daydream about buying a brand new car, our brains respond in the same way as it would when we actually make the purchase. Basically, we should harness this same feeling and apply it towards saving money.

Saving is much easier when it is for something specific. One idea is to open different saving accounts for each one of your goals. Open one for that new car. Open another for that family vacation or even your children's college education. You will be amazed at how easy it becomes to save for these specific "daydreams."

Another effective technique is to remind yourself to save whenever your paycheck comes. Write simple messages on a calendar or set up your computer or email program to prompt you to put money into your savings account. You have to remember to "pay" your savings.

Our second problem is Lack of Understanding. Our brains just can't quite wrap itself around the idea of the profitability of savings. Many individuals forget the power of compound interest. If you invest $10,000 at a 5% interest rate that amount will almost triple in 20 years.

Everyone underestimates the interest earned by their savings. Millions of Americans are paying interest rates of 20% or more on their credit cards. We should never underestimate how much our debts cost nor should we second guess how much our savings can grow.

The third and final reason for us having such as hard time saving money is OPTIMISM. Most individuals look ahead and believe their situation will improve. Researchers believe that our attitudes towards savings are strongly shaped by the economic conditions we experience.

The past two decades we have experienced a relatively good stock market with a few gentle downturns. Most individuals who lived during this time became optimistic about future investments and were willing to take big risks. Those who lived during the 1970's, experience a poorly performing stock market and thus acted with much more caution.

Those of us who are living during this terrible economic downturn should find it much easier to save. We have seen firsthand how important it is to save your money. The world is an uncertain place and saving your money in order to get you through the tough times is a goal we should embrace.

One of my favorite books about money is Robert T. Kiyosaki's "Rich Dad, Poor Dad." The best summary for the book is it tells you to make your money work for you. That is a goal we all should strive for. Take advantage of your savings account and with a balanced plan, you can reach your goals. Whatever they may be.