You Don't Have to Be Rich to save Money

Having more money will not save you if you don't believe in your ability to manage money

Feb 16, 2024

All wealth is created from income.

That’s a phrase I have repeated often in my writing and is something I believe to be an objective truth.

Without an income that exceeds at least a modest—but comfortable—cost of living, it’s impossible to save enough money to build significant wealth.

BUT

I want to be crystal clear about something:

You can still save money even on a modest income—and if you believe that you are capable of doing that, your odds of building wealth when your income rises in the future will increase exponentially.

Today, I am reviewing a research paper that shows that believing in your ability to manage money might be the key to crushing your financial goals regardless of how much money you make.

You can view your money objectively and subjectively

The research paper in question is appropriately titled “You don’t have to be rich to save money: On the relationship between objective versus subjective financial situation and having savings.”

In any part of your life, whether it be your income, health, career, or personal relationships, there’s an objective truth (how it is) and your subjective assessment (how you think it is).

The researchers point out that our subjective assessment of our life has more impact on our happiness than the objective reality—especially when your basic needs like food and shelter are satisfied.

They point to the example of how a person perceived their body weight. There is an objective way to measure this by looking at body mass. But whether or not a person is happy with their body is less about their body mass and more about how they perceive their body.

There is so much societal pressure to look a certain way that many people think of themselves as “too skinny” or “too heavy,” even if their actual body mass does not back up that self-assessment.

Perception becomes reality, and this perception can lead to harmful thoughts, which lead to problematic behavior around food, exercise, and other lifestyle choices.

This is also true for your self-assessment of your finances.

If you view your finances negatively, that breeds negative thoughts about your financial future, which can impact your financial decision-making without you even realizing it.

We all know it’s cheaper to buy and cook your food than order food on Uber Eats.

But, if you have negative thoughts and a feeling of hopelessness about your financial future, you’re more likely to use Uber Eats more often— you’re likely to think, “Why bother even trying to spend less? It won’t make a difference.”

This overspending makes it less likely you’ll save any money and further entrenches that feeling that you’ll never get ahead financially.

It’s a self-fulfilling prophecy.

But here’s the good news: self-fulfilling prophecies work both ways.

If you look at your current financial situation in a positive light, you breed positive thoughts and hope for your financial future. These positive thoughts can lead to positive behavior.

You’ll be more likely to say, make an effort to buy and cook your food rather than ordering in every night when you believe that your actions today can make a tangible impact on your financial future.

Financial self-efficacy is one of the most important assets you can have in life.

If you have financial self-efficacy, it means you believe that you have what it takes to make the necessary choices with your money to build a strong financial future.

If you want to be successful with money, you MUST have financial self-efficacy regardless of whether your income is high or low.

The power of being a financial optimist

In the study, the researchers studied the impact people’s objective and subjective financial situation had on their savings.

A person’s income was used as a proxy for their objective financial situation, and using survey questions, they measured how people perceive their financial position as a proxy for their subjective financial situation.

Before reading the results, I assumed that they would find that income would be the only thing that made a significant impact on savings.

I was wrong.

They found that higher income only led to significantly higher savings rates for people who scored high on their subjective financial situation.

Translation: Higher income only led to higher savings rates for people with a positive view of their financial situation.

To quote the researchers:

“Although objective financial situation was significantly positively related to the amount of savings, this was especially the case among participants with high scores on subjective financial situation.
Thus, those who have more money at their disposal have more savings, but only as long as their perception of their financial situation is good.”

Two people could make $100,000, but if one person was optimistic about their financial situation, they were much more likely to save a lot more money.

The researchers believed this can be explained by financial self-efficacy. Here’s another quote from the paper:

“These findings can be partly explained by Bandura’s self-efficacy theory, according to which there are people more (vs. less) prone to believe that they have the ability to influence their lives and, thus, achieve their goals.
Previous research showed that self-efficacy is positively related to optimism. Thus, it is possible that individuals high in self-efficacy who believe they have the ability to influence the events of their own lives would also be more prone to be financial optimists and perceive their financial situation as relatively better than those who score low on self-efficacy scales (i.e., financial pessimists). ”

Here’s how I would summarize all this into a single sentence:

Having more money will not save you if you don’t believe in your ability to manage money.

This leads to an obvious two-step action plan if you want to build more savings and future financial flexibility and freedom.

Step 1: No matter your current income, learn how to become more optimistic about your financial life.

Step 2: Work on increasing your income.

You need both steps to maximize your odds of success.

It’s not magic; you still need to build a financial plan. But building a financial plan is the easy part.

Sticking with that plan regardless of the crap life throws at you is the hard part—That’s where financial optimism and self-efficacy come into play; it allows you to stick with your plan.

How to become a financial optimist

Financial optimism is something I have written about quite a bit already. If this article has inspired you to work on building your financial optimism, I have two articles you must read.

This article builds the case for becoming a financial optimist—but with the caveat that you can’t let your optimism blind you from your financial reality.