We all know we should save money for retirement and unexpected mishaps like that broken heater in middle of winter. But, like many tasks in our lives, saving for the future is easier said than done.
Despite historically low unemployment rates and increasing household income, Americans still aren't the greatest savers. The average American saved just a little over 3 percent of their disposable personal income in October, according to the U.S. Bureau of Economic Analysis. That's compared with savings rates of 19.3 percent in Japan and 5.5 percent in the United Kingdom, according to Trading Economics, a global economic data provider.
Of course, many workers struggle to save simply because their day-to-day expenses eclipse their earnings. But sometimes, a lack of savings could be more of a psychological phenomenon than a monetary one. Research regularly shows that saving money demands a great deal of forethought, self-control and willpower — capabilities that are in direct conflict with our innate desires for pleasure and satisfaction in the here and now.
Nobel Prize laureate and renowned behavioral economist Richard Thaler said in an interview with The Wall Street Journal that saving for retirement is “cognitively hard” and that it's “obviously preposterous” to assume that everybody will figure out how much they have to save and actually carry out the plan.
The key to saving more is understanding your weaknesses and using tools and strategies that can help you do the right thing without having to think too hard about it.
We've done the hard part for you and found research-backed methods that may help you save more. Follow the tips below to start saving more — and saving smarter — in 2018.
Think present. Act now.
The first step to solving your debt problem may be to understand your personality — more specifically, how you think and feel about time. That's because time orientation, or the way we think about time in relation to our goals, plays a major role in people's ability to save.
In a 2014 paper published in “Psychological Science,” scholars Leona Tam and Utpal Dholakia concluded that individuals who think about savings cyclically — seeing life events as a series of repeating experiments — are estimated to save 74 percent more than those who think linearly. People with linear time-orientation view life in past, present and future terms.
Tam and Dholakia found that those with a cyclical mentality will likely save over time because they tend to believe that their future situation will be similar to what it is now. Rather than being overly optimistic about their savings potential in the future, which might cause them to put off saving money until later in life, these people will go ahead and start saving now. And by focusing on saving in the present they are more likely to make it a routine.
On the other hand, those who think about life in past and future terms may be more likely to put off savings longer because they feel they'll be better prepared to save later in life.
“The belief is that if you perform an action in the current cycle now, you will be more likely to perform this particular action in the next cycle,” Tam and Dholakia wrote. “But if you do not perform now, you will be less likely to perform it in the next cycle.”
The importance of time perspective is also underlined in a 2014 study performed by renowned psychologist Philip Zimbardo in partnership with MagnifyMoney. The study looked at how people's perception of time impacted their financial health.
After surveying 3,049 participants in six countries, Zimbardo, co-author of “The Time Paradox,” found that individuals who make decisions based on negative past memories tend to be in good financial health. They are more conservative and likely to save for their future to avoid a repeat of previous negative experiences.
In contrast, those future-oriented optimists are more likely to make bad financial choices and be less financially healthy.
But out of the three time orientations — past, present, or future — the group that was in the worst financial shape was the present-minded one. These people are more likely to focus on the here and now, leading them to make impulsive decisions without considering their future.
Automate your savings
Yes, it's just that simple. Behavioral economists have concluded that in order to save more money, you have to make saving as easy as possible and spending as difficult as possible.
“If people have to actively think about saving, then they probably won't do it,” Shlomo Benartzi, a behavioral economist at the University of California, Los Angeles, wrote in the “Harvard Business Review” earlier this year. Automated deposits are the most effective way to save for retirement, he argued.
U.S. companies are increasingly changing their 401(k) enrollment policies from requiring employees to “opt-in” to participate to new ones where workers are automatically enrolled upon employment and are required to “opt-out” if they would like to avoid enrollment. Because that dropout action requires extra time and effort, fewer people would withdraw from their 401(k) plans.
A 2005 study by William G. Gale, J. Mark Iwry, and Peter Orszag found that workers are more likely to save for retirement if they are automatically enrolled in a company 401(k) plan than if they were given the choice to opt in.
Besides participating in your company's retirement plan, you can also auto-save a portion of your salary to your savings account. Many employers set up automatic deposits from your paycheck into multiple checking or savings accounts. You can have a portion of your paycheck automatically transferred into a savings account so that you will be less inclined to touch that money. This might make it easier for you to resist the temptation to spend.
Automate periodic savings increases
This is auto-saving 2.0.
Thaler and Benartzi carried out their well-known “Save More Tomorrow” study from the late 1990s to early 2000s, following more than 21,000 workers at three different companies.
In one portion of the three-part study, the researchers followed 315 workers at an unnamed manufacturing company. About 160 workers elected to increase their 401(k) contributions each year for four years and 32 of them opted out over the years.
In the end, they found the majority of the people who agreed to the annual contribution increases nearly quadrupled their saving rates.
The success of the program shows the power of inertia — the tendency for objects or people to continue moving in a certain direction unless they take action to change it. Once their savings strategy was set — increasing annually with their raises — very few people ever got around to changing their savings allocations again once they enrolled.
You can mimic these results on your own as well. If you are comfortable enough to start saving more, try adding 1 percent more to your retirement fund every six months. Some retirement plans even offer automatic step-up contributions, where your contributions are automatically increased by 1 or 2 percent each year.
Larry Heller, a New York-based certified financial planner and president of Heller Wealth Management, suggested that you increase your contribution amount for the next three pay periods and repeat until you hit your maximum.
“You will be surprised that many people can adjust with a little extra taken out of their paycheck,” Heller told MagnifyMoney.
Set an actionable plan with negative consequences
One of the big reasons why people fail to save more is a lack of motivation. Dean Karlan, an economics professor at Yale University, created the “commitment contract” theory, arguing that establishing the economic penalty for failure of saving helps people hit their savings goal.
Here is how the commitment contract works: It allows people to set a positive goal, for instance, to save more money or to set a New Year's resolution. If they fail to accomplish the goal, they may be subjected to some form of penalty per the terms of their contract.
The idea is that your motivation to save money is enhanced by a contract where negative consequences are imposed if conditions are not met.
For example, a die-hard animal rights activist might develop a commitment contract to save $2,000 in five months for an international trip, with the stipulation that if this person violates the contract, he or she must buy a $70 ticket to a SeaWorld theme park.
There doesn't appear to be a savings app that will implement economic punishments if you didn't hit your savings goal. But you can: join a like-minded accountability group on social media, or ask a friend or family member to be your accountability partner. They could play the “bad cop” for you while you are saving toward a goal. The hope is that you will feel the pressure to carry out your plan under supervision, in addition to the contract you have committed to. And if you miss the target, this partner would ruthlessly urge you to pay your penalty.
Focus on smaller goals first
Now you know you need to establish a savings goal, but it might be daunting to even think about achieving that goal.
Experts found that breaking down the goal into manageable pieces spurs confidence, even though the ultimate amount of money that would be saved is exactly the same.
Benartzi and his colleagues at UCLA asked a group of participants if they would like to save $5 every day, and another group if they wanted to save $35 a week, and the third group whether they thought they could save $150 a month. The results were astonishing: Nearly 30 percent of the participants said they could save $5 a day, while just 7 percent elected to save $150 a month.
Bloggers have popularized the $5 savings challenge as well, where people were encouraged to save every $5 bill they come across in their wallet instead of spending it. One woman claimed she saved $40,000 over 13 years just by socking away her $5 bills.
Let's say you want to make it easier to save for an iPhone X (about $1,000) in seven months. Instead of telling yourself you'll save $150 per month, break it down even further by committing to save $5 per day. You might achieve that by cutting back on your daily dining-out budget. Just take it one baby step at a time.
And you don't have to literally take the money out of your wallet. You could use an app that helps you save in small amounts over time as well.
Digit connects to your checking account and tries to find spare money in your account to transfer to your Digit savings account. You can command the app via text messaging to save more, deposit money into savings, or transfer money back to your checking account. Note: the app is free to use for the first 100 days. After that, it charges $2.99 per month.
There is also Acorns, a microsavings app that automatically invests a small amount of money daily, weekly or monthly for you. One of Acorn's interesting features is it rounds up your purchases to the nearest full dollar amount and makes the change available for you to invest. Let's say you used a credit card to buy a cup of coffee for $2.75. You can choose to invest the 25 cents on the app, or Acorn will invest the change for you if you elected automatic roundups investment. It's free to open an Acorns account. The app charges $1 per month if your balance is under $5,000, or 0.25 percent per year if your balance is $5,000 or more.
Save that big windfall
Scholars Peter Tufano and Daniel Schneider wrote in a 2008 paper that it's relatively easier for people to save lump-sum distributions because they perceive those funds differently from their regular income. An annual tax refund, inheritance, performance bonus, or graduation or wedding gifts are seen more like an unexpected surplus of money.
When you get that big year-end bonus or your tax check in the 2018 tax season, you may want to save the large portion of the refund while putting a smaller amount in your checkings account. You will feel good saving for durable items, such as household appliances, a car or a down payment but leaving a little room for the occasional self-indulgence.
Track your spending and have real-time feedback
You thought you knew how much you spent in Starbucks each month, but you might be surprised by the actual dollar amount going into coffee once you start tracking your expenses.
Benartzi and fellow researcher Yaron Levi reported that those who used a mobile app that tracked spending and investment performance cut back on their spending by 15.7 percent.
Their findings align with results from a 2016 Federal Reserve study: About 62 percent of consumers with access to mobile banking checked their account balance on their phone before making a big purchase, and half of them decided not to buy that item because they were informed of their real-time account balance and credit limit.
It's time to download a budgeting app that aggregates all your financial accounts — debit and credit cards, retirement accounts, brokerage accounts, and so on. Once you get an accurate sense of your finances, you may think twice before buying that $1,000 Canada Goose parka.
MagnifyMoney is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.