Hal Hershfield, Ph.D.
Consultant to Avantis Investors®
The advice to “save more” isn’t all that far off from “get more exercise.” Even though we all know it’s important, many of us have a hard time following through. But it’s hard to save more if you haven’t started in the first place. And it may be just as hard to make a change to your saving habits if you’ve been coasting for a while.
If this is true of someone you’re advising, you’re not in a unique position. The numbers vary, but at least one recent survey found that about a fifth of working Americans don’t save any of their income annually.1 And a similar story can be told for retirement: About 15% of working Americans have nothing saved for their later years.2
So, how do you make a change to your saving habits? Wouldn’t it be nice if Nike’s tagline were as strong a motivator in this context as it is in the athletic sphere? (Actually, “Just Do It” has never gotten me to jump out of bed for an early morning workout, but I digress). Absent any magic pill, when it comes to figuring out how to start saving or make a change to your existing habits, recent behavioral science offers some good, practical strategies.
“Saving” can sound so abstract. What are you saving for? Even the three main categories— emergency savings, retirement and other specific short- and long-term goals—can lack a sense of concreteness. So before thinking about how to get started, it may be helpful to take a minute to consider these categories in more detail.
What does emergency savings entail? Here’s one way to think about it: If your income dried up, what would you absolutely need to pay for? Presumably housing, food, car payments and credit card bills. Anything else? Get a sense of what these things cost each month and add them up. The conventional wisdom is that you need to sock away about three to six months’ worth of emergency savings.
Retirement sounds straightforward, but a little thought can make you realize it’s not so simple. For instance, do you anticipate working until you’re quite old, or do you want to retire as soon as you can? Do you want to stop working entirely or maintain some side hustle?
It can be challenging to answer these questions, especially if you’re in the early part of your career. Yet, putting some thought into your responses—and recognizing that you can always revisit them—can help determine the rate at which you’ll need to save. Will you need to fund a few years or several decades where you don’t have an active income?
Which of these goals should come first? Opinions vary, but one option is chipping away at your emergency savings and retirement at the same time. But wait, wouldn’t you arrive at your emergency savings goal faster if you just focused on that? You would, but it could take time, and time is your friend when it comes to reaping the benefits of compound interest in a retirement account.
Once the ball gets rolling on your emergency savings and retirement accounts, then you can start to think about the other fun short- and long-term goals.
Many of us probably intend to start saving or increase our saving rates, but barriers arise when turning those intentions into reality. Just like dieting and exercise, our follow-through tends to be subpar when it comes to socking money away.
One solution is to introduce an “implementation intention.”3 To get something done, don’t just make an intention; make an intention for how you’re going to implement a given plan.
So, for saving, an obvious step might be figuring out which platform you’re going to use to invest your money. But go beyond that and determine exactly when you’ll visit that company’s website and start a transfer of funds. Or maybe your intention is even more basic, and you need to research investment company options. In either case, telling yourself you’re going to do it won’t go nearly as far as blocking off time in your calendar to get it done.
Such implementation intentions have effectively boosted behaviors as far-ranging as flu vaccinations and preventative colon cancer screening.4,5 Better yet, tell your partner or best friend about your plan, as social accountability can also help.
Now what? Once you’ve decided what you’re saving for and how to do it, a few other strategies can help nudge the process along.
First, don’t put too much pressure on yourself right away or try to rush things. Setting an intention and following through on it is an accomplishment, even if it was to review investment platforms and set up an account. It may make sense to start moving money from your checking account into the investment account sometime later but be mindful about when. A growing body of research suggests you might be able to take advantage of “fresh starts,” like the start of a new month or new year, as it will feel easier to start with a clean slate.6
Second, when you start moving that money over, don’t bite off more than you can chew. Start small with bite-sized chunks.7 A small amount each pay period will put you on the board and feel easier to sustain than trying, in one fell swoop, to make up for past years when you weren’t saving. Plan to increase your savings amount if you get a raise: The increase likely won’t feel too painful if it’s tied to an increase in income.
Third, if your income is relatively consistent from month to month, then make your savings automatic. “Set it and forget it” isn’t just a cute rhyme. Recurring savings plans work because they take advantage of our natural tendency to go with the status quo.
The ideas I’ve raised here are meant to be starting points along the journey of saving more. I use the word “journey” in an intentional way, as it may be useful to think about the initial stage of saving as a process in and of itself. Beginning that process may be the hardest step, and it’s something we might start and stop several times before fully getting into the swing of things. What matters is that you got started in the first place.
1Amanda Dixon, “Survey: 21% of working Americans aren’t saving anything at all,” Bankrate, March 14, 2019.
2Planning & Progress Study 2019, Northwestern Mutual.
3P.M. Gollwitzer, “Implementation intentions: Strong effects of simple plans,” American Psychologist 54, no. 7 (July 1999): 493-503.
4Katherine L. Milkman, John Beshears, James, J. Choi, et al., “Using implementation intentions prompts to enhance influenza vaccination rates,” Proceedings of the National Academy of Sciences 108, no. 26 (June 2011): 10415-10420.
5Katherine L. Milkman, John Beshears, James J. Choi, et al., “Planning Prompts as a Means of Increasing Preventive Screening Rates,” Preventive Medicine 56, no. 1 (January 2013): 92-93.
6Hangchen Dai and Claire Li, “How experiencing and anticipating temporal landmarks influence motivation,” Current Opinion in Psychology 26 (2019): 44-48.
7Hal E. Hershfield, Stephen Shu, Shlomo Benartzi, “Temporal reframing and participation in a savings program: A field experiment,” Marketing Science 39, no. 6 (2020): 1039-1051.
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