Do you ever feel like you have less than you need? This can mean insufficient money, time, food, social connections, or other essentials. All these circumstances are problematic: When we have too little food, we get "hangry"; when we have too few social connections, we get lonely; when we have too little time, we get stressed. And that usually prompts us to make decisions we may later regret. This behaviour can then quickly snowball, where one bad decision made under pressure can set the stage for others. Researchers call this cycle the scarcity trap.

One might think that a financial “scarcity trap” only applies to those with obvious scarcity—such as people experiencing food or housing insecurity—but that’s not the case. There are numerous reasons that people may feel money is scarce beyond their income level: In fact, around 60 per cent of Americans reported money-related issues as a significant source of stress in their lives. Also, more than half of US households do not have enough emergency savings to cover regular household expenses for at least three months in the absence of income.

Scarcity mindset: A psychological concept with very real consequences

Eldar Shafir and Sendhil Mullainathan, the founders of scarcity theory, define scarcity as "having less than you feel you need." This feeling of being deprived of a key resource—whether that be money, time, food, or drink—has the potential to affect our behaviour for the worse.

The mental bandwidth of those experiencing scarcity may be taxed by the added stressors that come with their situation. For example, people experiencing financial scarcity may have to devote more attention to decisions such as how they will pay an unexpected car expense or a larger utility bill than usual. Also, under certain circumstances, when we experience too much scarcity, we can fall prey to an ingrained, always-on scarcity mindset.

A scarcity mindset usually results in tunnelling, which is a singular, almost obsessive focus on the resource we are lacking. Have you ever noticed, for example, that the second you decide to stop eating chocolate, you can’t seem to get it out of your mind? That’s because tunnelling prompts us to excessively focus on what we lack, to the point that we can neglect everything else.

These psychological effects can then affect our brains, decisions, and behaviour. Research has found that scarcity can affect our neural mechanisms when making decisions, decreasing activity in the part of the brain that plays a role in goal-directed choice.

Also, when it comes to real-world financial decisions, researchers have found that people who are experiencing financial scarcity take out loans at higher interest rates, save less, and are more biased to the present.

Fighting back against the scarcity mindset

To break out of the scarcity trap, researchers recommend creating slack—in other words, creating a buffer for your future self. For people facing financial scarcity, this means building up an emergency savings fund. Accordingly, Morningstar research has found that households who had emergency savings were more likely to be financially resilient, even during extreme events such as the coronavirus pandemic.

A picture of four pink piggy banks in a row

More than half of US households do not have enough emergency savings to cover regular household expenses for at least three months in the absence of income.

However, building an emergency savings fund is easier said than done. If you’re having trouble building up your savings, here are a few behavioural tips to help you stay on track:

Take advantage of automation. Set up an automatic transfer from your checking to your savings account as soon as you get your pay. By making this process automatic and immediate, the act of saving will be out of sight and out of mind, making it easier for you to stick with.

Share your goal with a mentor. Try sharing your goal with a mentor to help keep you accountable. Though sharing goals with peers doesn’t always promote follow-through, doing so with a mentor can give you the motivation you need to persevere. This doesn’t mean that your mentor must keep track of your progress: Instead, sometimes the very act of letting them know can help keep you honest.

Build in flexibility on your way to goal attainment. Research suggests that allowing room for flexibility on the path to achieving a goal can help promote persistence. Say your goal is to save $1500 by the end of the year. You can set up an emergency reserve system in which your goal is to save $250 every month for the next eight months—but allow yourself two optional emergency skip months. If you don’t need to use a skip month, you end up with more savings than you set out for. But if you do need to skip a month or two, you are still on track to meet your initial goal. We all know that life happens and meeting your saving goal won’t always be possible. Creating a reserve system can help make sure you don’t get discouraged even if you falter.