Building wealth shares many similarities to living a healthy lifestyle. We have the resources to succeed but sometimes we need to trick our minds into performing certain behaviors.
If you know you need to increase your savings rate, of course, you can try cutting expenses. If this is easier said than done or if you’re already living a frugal lifestyle, try these hacks to save more money.
1. Save more…tomorrow
A simple recommendation to “save more today” usually means you have to cut expenses. The problem with this approach is that it requires us to give up something—part of our lifestyle.
The alternative approach is committing to save more money in the future.
This approach has been studied by Nobel Laureate Richard Thaler and co-author Shlomo Benartzi in their book, Save More Tomorrow. The premise is simple—have people make a commitment to saving more money at a determined future date. If you need to increase your retirement savings, try this! Make a commitment right now to increase your savings by a certain amount next year.
This approach was studied in an employer-sponsored retirement plan. The results were astounding:
- 78% of employees committed to “save more tomorrow” by increasing their savings at 3% per year.
- 28% of employees took the more traditional approach to “save more today.”
After four years in the program:
- Those who accepted the recommendation to “save more today” increased their savings rates from 4.4% to 8.8%.
- Those who instead decided to “save more tomorrow” increased their savings rates from 3.5% to 13.6%!
Why is this hack so effective? First, it’s much easier for us to commit to a future action. Second, this trick allows us to increase savings while keeping our lifestyle the same, assuming your income also increases with inflation. The good news is a growing number of 401(k) plans give you the ability to put future increases on autopilot. However, if your 401(k) doesn’t allow this, you’ll have to manually increase your savings rate every year.
2. Separate your savings
If you’re having trouble saving for short or intermediate-term goals, try separating these funds from your normal transaction accounts.
A classic approach is the envelope system, but why not use technology to make your life easier? I use my Betterment Accounts to map out my future savings goals. Instead of having a single savings account, I can match up my goals to their recommended investment portfolio.
For instance, for a very short-term goal (i.e. one year or less), a high yield savings account makes the most sense. For a five-year goal, a conservative investment portfolio might be recommended. Additionally, Betterment’s goal planner gives me the recommended one-time or monthly savings amount needed to hit my goal.
3. Name your accounts
What’s more exciting, transferring money to “Membership Savings” at the credit union or transferring money to an account titled “Summer Vacation Cabin?” Even if both accounts are boring old savings accounts, the fact that your goal (buying a cabin to escape the hot Arizona summers) has a name does two things:
- It makes your goal visible.
- It increases the satisfaction you receive when saving money. The goal is to mimic the feeling you get when you buy something.
If you’re having a tough time setting aside money for future goals, could it be you haven’t made them visible and exciting? What’s great about this trick is it’s easy. You just have to find a bank that allows you to rename the accounts (and one that preferably doesn’t charge a fee for each account). Fortunately, Betterment also allows me to do this!
We all know the benefits of saving money. Sometimes, we just need a little nudge or mind trick to make it happen! Fortunately, technology can assist.
If you are new to investing and would like to begin saving for future goals, Stewardship can help. In partnership with Betterment, we have provided an easy online investment experience for you.
