Building a secure financial future is empowering, even if it can seem daunting. While expenses may arise and the cost of living might go up, saving consistently can help you navigate financial challenges that might arise. A cash back credit card can help you save by providing you with money back on your purchases.
Here's what you need to know about spending habits and how you can use a cash back rewards card to save money.
The Psychology of Saving
The following theories on spending and saving can give insight into how you view money.
Loss Aversion
Loss aversion is about how people feel more negatively about losing a specific amount of money than they would feel positively about finding that same specific amount of money.
Essentially, the horrible feelings of losing $20 outweigh the happiness of randomly finding $20. Fear of missing out (FOMO) or of being left behind also plays a large role in risk aversion, causing people to make reactive purchases. Because people don’t want to miss out or fall behind, they’re likely to spend money than save it.
Present Bias
Present bias is the theory that people prioritize short-term gains or instant gratification over long-term growth. This causes people to undervalue their future needs over their present wants. Like loss aversion, present bias also leads to reactive, impulse buying.
Mental Accounting
Mental accounting refers to people mentally sorting their funds into separate “accounts,” and then placing different values on each account. Subjective criteria placed by individuals onto each account determines the worth of the account. For example, you might receive a bonus at work and categorize that money as “extra” money, leading you to spend it on a want rather than on a need.
It's normal to engage in mental accounting. For example, many people don’t perceive cash back rewards as real money because it either goes against your credit card bill or is automatically deposited into the account of your choice. Because it’s not money you can touch, it is often viewed as a bonus, which can lead to increased spending. Recognizing that cash back can help your budget or your savings will enable you to save more.
Taking small steps such as recognizing when you’re making an emotional purchasing decision and focusing on the value of money over time can make a huge difference in your savings habits. Viewing your savings goals in a positive light can increase the motivation you have to save your money.
How Cash Back Rewards Influence Saving Behaviour
Cash back credit cards that offer you rewards on purchases you are probably going to make anyway (such as for gas, food, and everyday needs) can help you on your saving journey.
Rewards cards that offer cash back can give you the motivation needed to start saving. Set small savings goals and put your cash rewards towards those goals. You’ll be surprised at how quickly your savings can add up, and meeting or exceeding those goals can motivate you to take it even further.
Set boundaries with yourself. Don’t make large purchases just to earn cash back. But strategically using that card for your regular purchases to earn money back can help your budget and your savings. Remember that your cash back can’t be your only method of saving money. It should enhance your savings strategies, not be the focus of them.
Strategies for Using Cash Back Rewards Effectively
Setting yourself specific and realistic savings goals is an important step in planning for your financial future. Some things you can do include:
- Have your cash back rewards deposited directly into a savings account.
- Be aware of your typical spending categories. Different cash back credit cards offer various rates on different categories. For example, if groceries are a significant expense for you each month, opt for a card that offers a higher rate of cash back rewards in the groceries category.
- Look into special offers such as welcome bonuses, which can maximize your cash back.
- Keep your eyes open for promotions, which pop up all the time.
- Challenge yourself to save your monthly rewards and watch your savings grow.
Take some time to understand the psychology of spending. You might be surprised to find out how many factors influence your spending. Understanding your factors enables you to adjust your spending habits, so you can achieve your financial goals.
