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The Power of Defaults: How to Trick Yourself into Saving Money
Ever noticed how some people save money effortlessly while others struggle despite having the same income? The secret might not be discipline, but design – specifically, the design of defaults.
NUDGE THEORY / DEFAULT BIAS
Default bias means we tend to stick with the pre-set option instead of making an active choice. In behavioral economics, this is called a nudge i.e. a gentle push that guides people toward better decisions without taking away their freedom to choose. For example:
- When your phone automatically updates apps unless you turn it off, you usually let it happen.
- When you’re automatically enrolled in a company’s savings plan, chances are – you’ll stay in it.
How This Helps You Save Money
Most people intend to save, but never get around to it. That’s where defaults can trick your brain in a good way!
- Automatic Savings
Set up your bank account so a portion of your income automatically transfers to your savings every month. You won’t have to decide to save—it just happens by default. Over time, this builds wealth effortlessly.
- Auto-Investments
Use SIPs (Systematic Investment Plans) or recurring deposits. Once you start them, the “default” is to keep investing. Cancelling takes effort – and because of default bias, you’re likely to stay invested.
- Default Budgeting Tools
Apps that automatically categorize spending help you see where money goes without manual tracking. This “default awareness” makes overspending harder.
Real-World Example
Countries that make organ donation the default option (you opt out if you don’t want to participate) have much higher participation rates than those where people have to opt in.
The same psychology applies to saving – make saving your default mode.
Tips to Set Your Own Defaults
- Open a separate savings account and enable auto-transfer.
- Join an automatic investment plan or pension scheme.
- Use tools that round up purchases and save the difference.
- Keep your debit card for essentials only – make “not spending” your default choice.
Hence, you don’t need more willpower to save — you need smarter systems.
By setting up the right defaults, you can trick your mind into doing what’s best for you without even trying.
Mental Accounting: Why You Splurge on a Small Win and Pinch on a Big Loss
Have you ever received a small bonus or gift money and instantly spent it on something fun but when you lose a similar amount, you suddenly turn into a strict budget keeper? That’s mental accounting in action – one of the most fascinating concepts in behavioral economics.
MENTAL ACCOUNTING
Coined by economist Richard Thaler, mental accounting explains how people treat money differently depending on its source, purpose, or emotion attached to it – even though money is fungible (a ₹100 note is still ₹100, no matter where it comes from).
We create mental “accounts” for our finances:
Salary money – for bills and essentials
Gift money – for fun or treats
Emergency fund – for savings only
These mental labels often lead us to make irrational money choices.
Everyday Examples
- You win ₹1000 in a lucky draw and instantly buy a new pair of shoes because “it’s bonus money!”
- But if you lose ₹1000 while shopping, you skip dinner out that week to “make up for it.”
- You happily spend ₹500 on popcorn at the cinema, but hesitate to spend ₹500 on groceries the next day.
Same money, different feelings — that’s mental accounting at play.
Why We Do This?
Because our brains crave emotional balance and control. We like to believe we’re being smart with money, so we mentally divide it into categories.
This helps us justify some decisions like “I deserve this small treat” and rationalize others like “I can’t afford to waste more after that loss”.
How This Affects Savings and Spending
- We overspend from “windfall” money (like gifts, refunds, bonuses).
- We avoid risk after a financial loss — even when opportunities are good.
- We struggle to save because we see savings as “sacrificing” fun money.
Smart Ways to Use Mental Accounting
You can actually turn this bias into a saving tool:
- Create positive mental labels – call your savings account “Travel Fund” or “Freedom Fund.” It builds emotional motivation.
- Pre-commit fun money – set aside a small “guilt-free” spending budget so you don’t overspend impulsively.
- Treat bonuses like income – don’t label them as “extra”; treat them as part of your financial plan.
Hence, Mental accounting shows that money decisions aren’t just about math – they’re about mindset. If you learn to recognize how your brain creates these invisible money “buckets,” you can make smarter, more consistent financial choices without giving up joy or balance.
Present Bias: Why ‘Future You’ Pays the Price for Today’s Choices.
You know that moment when you say, “I’ll start saving next month,” or “I’ll study after one more episode”? That’s not laziness — it’s present bias, a powerful behavioral quirk that makes us value today much more than tomorrow.
Hyperbolic Discounting / Present Bias
Present bias means we prefer immediate rewards over future benefits, even when waiting would give us more value. In behavioral economics, this is also called hyperbolic discounting — our tendency to “discount” (or undervalue) the future. For example:
- You choose ₹500 today over ₹600 a week later.
- You skip saving for retirement because that’s “too far away.”
- You hit snooze instead of exercising because the comfort is instant.
Our brain is wired to prioritize pleasure now and postpone pain later — a habit that often makes future us suffer.
Everyday Examples
- You buy dessert even while on a diet — because it’s now or never.
- You spend your entire stipend, thinking you’ll save “from next month.”
- You promise to start studying “tomorrow” — and somehow, tomorrow never comes.
All these choices favor short-term comfort over long-term gain.
How It Affects Money and Life
Present bias explains why:
- We delay saving and investing.
- We overuse credit cards (instant satisfaction, delayed payment).
- We procrastinate on important goals because results aren’t immediate.
In short, present bias is why future you ends up paying for present you’s decisions — literally and emotionally.
How to Outsmart Present Bias
You can’t completely switch it off — but you can design habits that protect future you:
- Automate good decisions – Set auto-savings or automatic investments. No decision = no delay.
- Make future benefits feel real – Visualize what that money or effort will bring: freedom, security, travel.
- Add friction to temptations – Hide shopping apps, keep snacks out of reach, use cash instead of UPI for instant purchases.
- Reward yourself smartly – Pair effort with small, immediate rewards (like coffee after a study session).
Hence, Present bias is part of being human — we all live in the now.
But if you learn to notice it and nudge yourself gently, you can make today’s choices that your future self will actually thank you for.
MY POV
It’s been a while since I shared my personal perspective in my blogs, but here I am! My goal behind writing about personal finance management is to reach young adults who are smart enough to earn but often struggle to manage their money wisely. Behavioral economics is a fascinating and practical field that helps us understand why we behave the way we do. By applying these simple concepts and making small changes in habits, you can truly master money in your early 20s. Concepts like present bias, mental accounting, and nudge theory are among the most powerful ideas when it comes to understanding money behavior.
Start small today — your future self will thank you (and give me some credit and….. may be drop a “thank you” too if you’ve been following my blogs and using these tips!😉
📌Author’s Note:
This blog is not just research — it’s a step in my journey toward working with global institutions like the IMF and World Bank.
Stay tuned and grow with me!
