Most of us don’t save enough. According to one estimate, people who start saving at age 25 should put away about 15 percent of their income for retirement. This percentage climbs to a whopping 43 percent for people who start at age 40. Not surprisingly, this is hard to achieve.
A number of factors contribute to this difficulty, as recently outlined here. The future rewards that saving allows us to reap are intangible, and saving pots (especially for retirement) are the cumulative effect of many seemingly insignificant contributions. People are also often motivated to keep up with other people’s spending by sacrificing future consumption in favor of present wants and needs.
It’s this focus on the here and now that’s the crux of the problem. It gets us into trouble again and again. Saving money requires planning and self-control. Unfortunately, willpower is a demanding process with fickle outcomes. An example from the domain of health illustrates this point very well. In an experiment recently featured on TV (originally published here in a slightly different form), volunteers were recruited for a study and asked to perform a physically arduous task in the form of a ”wall sit”. They were then split into two groups.
Individuals in the test group were seated at a table and asked to fill in a questionnaire. A plate of delicious smelling cookies was placed on the table. Unbeknownst to them, they were put there deliberately, so participants would have to resist the temptation to eat them (all of them actually did this successfully). Individuals in the control group did not have to exert self-control.
All participants then had to the physical task. Guess what happened? You guessed right: people who previously had to exercise willpower had a marked decrease in performance. They perceived the task as more painful and quit the wall-sit sooner than those in the control group.
So, when it comes to your finances, should you just capitulate by giving in to your pain and buy that fancy TV that you don’t really need? Obviously not. Self-control is a human virtue that should be fostered.
From a behavioral science point of view, things look a bit different. While we need to promote the exercise of willpower or self-control, we also have to work with human shortcomings to achieve results. Automatic enrollment in retirement plans, for example, is a simple behavioral intervention that works with people’s tendency to do nothing.
Another important behavioral approach to increasing savings is based on good timing. That’s all about accepting that people live in the moment by targeting “savable moments”. A number of apps are available already that allow you to "save when you spend," for example, by putting away your spare change when you make a purchase.
More significant but less frequent savable moments happen if you're a worker who gets paid bonuses or when a relative leaves you an inheritance. But the most widespread of those moments isn’t about the money left by Aunt Daisy in Florida—it’s your tax refund from Uncle Sam in Washington DC.
Researchers recently reported the results of a large scale study conducted on more than half a million TurboTax users from low-moderate income households. They found that encouraging people to save their federal refund for emergencies, big ticket purchases, or retirement made a significant difference. People saved up to 50 percent more money than they would have otherwise.
The success of behavioral interventions like this is not just down to sending the right message at the right time. It’s also a matter of making the behavior as frictionless as possible. Indeed, Richard Thaler, the Nobel Prize winning behavioral economist, has one simple mantra in his nudging approach to behavior change: “make it easy”. This is where technology can help turn your savable moments into actual savings.
So, as you plan for your financial future, why not start by identifying your personal savable moments? And before you convert that cookie jar into a coin jar, consider taking advantage of the technology that others have designed for you to make it easier and more impactful. Your tax return will be a good start. Seize the moment!