The Psychology Of Saving

“The cost of saving too little is less than the cost of saving too much.”

Have you ever really thought about the cost of NOT saving?  It can be pretty high.  Just fill in the blank:  If I fail to save for retirement I might ______________.

• Have to work longer than I want to
• Be a burden on my children
• Not get to do the things I want to in retirement years

We never really question the costs of saving too much.  That’s because the benefits obviously outweigh the immediate sacrifice (most of the time :) ).

If this is sounding a little philosophical…I apologize.  But the truth is that the practice of saving money really has a lot to do with how we behave and the psychology of saving can really be interesting to think about.

Interesting Ways To Save

I’ve never heard anyone complain of having saved too much money!  When we step back and look at the ways banks and retirement programs encourage people to save through subtle psychological nudges, it helps us recognize the benefits of using these behavioral based tools.

Keep The Change Program

In 2005, Bank of America launched a program that changed the way its clients saved.  For each transaction you made, Bank of America would round up and put the extra money into your savings account.  A coffee of $1.65 would appear as $2.00, and $0.35 would go into your savings account automatically.  The idea behind it was definitely unique, which is probably why their data shows that 99% of people who started with the ‘keep the change’ program stuck with it.

Retirement Matches

It’s surprising to me how many people I talk to on a weekly basis who aren’t taking advantage of their employer’s retirement match.  That’s one of the best returns you can get for your money!  In many cases, it can be an immediate 50-100% return on your dollar.  I’ve yet to see those kinds of one year returns on the average mutual fund!

Making Payments to Your Savings Automatically

Many banks will allow you to schedule transfers to your savings automatically each month.  If you get paid on a certain day, you can set up automatic payments to yourself by scheduling a transfer from your checking account to your saving account.  Make it for a day or two after your check normally hits your bank and you’ll turn your savings into a payment that happens automatically.

Auto Enrollment – Retirement Plans

One of the best ways to nudge someone into saving more is to automatically enroll them into a company retirement plan.  Most 401(k) and 403(b) providers have an auto enroll option that will open a retirement account for new hires.  I think every employer should consider an auto enroll option and do all they can to encourage their employees to save.  Studies show that participants are auto enrolled in an employee retirement plan will stick with their contributions much longer and subsequently have stronger retirement accounts than those who weren’t auto enrolled.

Have you created or used psychological tricks that help you to save more?  Share them in the comments!  It might help someone who needs a little nudge!