Saving more money is a popular goal. In fact, a recent survey showed that this year, more people want to save money than lose weight. But saving more isn’t always easy. For most people, it means cutting back on expenses. This can be especially hard when the inflation rate is over 8%.
The quickest way to increase your savings rate is to budget. Simply tracking your expenses can open your eyes to where your money is being spent.
What about those who are truly doing everything right but still need to increase their savings rate? Without cutting expenses or increasing your income, this can seem daunting.
Fortunately, there is one simple trick that you can use to increase your savings.
The trick to saving more money
Instead of saving more today, have you tried saving more tomorrow?
The concept is simple. Rather than cutting expenses to save additional money, you make a commitment today to save more money at a predetermined date in the future.
This “simple trick” actually has research to back it up. The approach was studied by Nobel Laureate, Richard Thaler, and co-author Shlomo Benartzi in their book, Save More Tomorrow.
The authors of the study used participants in an employer-sponsored retirement plan to test their hypothesis. 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%!
It works! The employees who made a commitment to save more in the future responded by quadrupling their savings rate in four years.
Why does this work?
The key to understanding why this trick works has to do with how we are hardwired.
First, “present bias” tells us we value rewards closer to the present time. It’s hard to cut expenses because these are rewards we experience now. By committing to a future savings increase, we can avoid present bias.
Second, the planned savings correspond to our future pay raises. If you are committing to annual savings increases, you are likely going to experience a pay raise to offset the savings. This is important because you are not required to cut expenses. The pay raise allows you to save more (and hopefully still have excess to spend elsewhere).
The last reason this trick works is because the participants in the retirement plan would have to opt-out once they are in the program. This extra step means someone has to take action to leave. As you can imagine, this is one extra step that most are unlikely to take. Therefore, they stayed in the program with the savings increases.
How you can put this into action
The easiest way you can put this into action is through your employer retirement plan. More and more 401(k)’s are offering automatic increases where you can specify the future date and amount of your savings increase.
For example, say you are currently saving 6% to your 401(k), with a goal to save 15%. Since increasing your savings by a whopping 9% might not be doable, you can schedule 3% increases every January 1st. After one year, you will be saving 9%, then 12%, and finally 15%.
Even if your 401(k) doesn’t offer automatic increases, you can make a commitment to manually increase your savings in the future. Schedule it on your calendar with the amount of increase.
Finally, other savings and investment accounts might have the ability to schedule future increases, depending on the provider.
Commit to saving more tomorrow!
If you are having trouble saving more money, put the methods of Saving More Tomorrow into action! Make a commitment TODAY to save more at a future date. But don’t just commit—actually put the savings increase into action!
