We all know that saving is important and is something that we should be doing; and yet, overall we’re doing less and less of it. We know what we need to do, the question is how do we do it.
That’s why I’m here to teach you your savings behavior isn’t a question of how smart you are or how much willpower you have. The amount we save depends on the environmental cues around us. Let me give you an example, TED ran a study in which in one group we showed people their income on a monthly basis. In another group we showed people their income on a weekly basis. And what we found was that the people who saw their income on a weekly basis were able to budget better throughout the month.
Now, it’s important to know that we didn’t change how much money people were receiving, we just changed the environment in which they understood their income. Environmental cues like this have an impact, so I’m not going to share tricks with you that you already know. I’m not going to tell you how to open up a savings account or how to start saving for your retirement. What I am going to share with you is how to bridge this gap from your intentions to save and your actions to save.
Are you ready?
Numero Uno!
Harness the power of pre-commitment. Fundamentally we think about ourselves in two different ways: our present self and our future self. In the future, we’re perfect. In the future we’re going to save for retirement, we’re going to lose weight, we’re going to call our parents more; but we oftentimes forget that our future self is exactly the same person as our present self. We know that one of the best times to save is when you get your tax return.
Based on this, TED tried an A/B test.
In the first group they texted people in early February, hopefully before they even filed for their taxes (in the US the cutoff date is around April) and they asked the individuals if they get a tax refund what percentage would they like to save. Now, this is a really hard question. They didn’t know if they would receive a tax refund or how much, but TED asked the question anyway.
In the second group, they asked people right after they received their refund what percentage they would like to save.
Now, here’s what happened. In that second condition, when people just received their tax refund, they wanted to save about 17% of their tax refund; but in the condition, when they asked people before they even filed their taxes, savings rates increase from 17% to 27%. When we asked in February why? It’s because they’re committing for their future selves and of course your future self can save 27%. These large changes and savings behavior came from the fact that we change the decision-making environment.
I want you to be able to harness that same power, so take a moment and think about the ways in which you can sign up your future self for something that you know today will be a little bit hard. Sign up for an app that lets you make savings decisions in advance. The trick is you have to have that binding contract.
Numero Dos
Use transition moments to your advantage. A company did an experiment with a website that helps older adults share their housing. The company ran two ads on social media targeted to the same population of 64 year-olds. In one group they said, “hey you’re getting older; are you ready for retirement? This is how sharing can help.”
In the second group they got a little bit more specific. The ad said, “you’re 64 turning 65; are you ready for
retirement? This is how sharing can help.” What they were doing in that second group is highlighting that a transition is happening. All of a sudden click-through rates and ultimately sign up rates increased when they highlighted that.
In psychology we call this the Fresh Start effect. Whether it’s the start of a new year or even a new season, your motivation to act increases. So right now put a meeting request on your calendar for the day before your next birthday; identify the one financial thing you most wanted to do; and commit yourself to it.
Numero Tres
The final hack. Get a handle on small frequent purchases. I’ve read a few different studies and found that the number one purchase people say they regret after bank fees is eating out. This includes me. It’s a frequent purchase we make almost every day and it’s death by a thousand cuts. A quesadilla here, a burrito there, it adds up and decreases our ability to save. Back when I lived in Panama I looked at my expenses one month and saw that I spent over $500 on ride-sharing apps. It was more than my living expenses at the time. I vowed to make a change.
In the next month I spent $500 again. No change. Because the information alone didn’t change my behavior. I didn’t change my environment, so now that I was $1,000 dollars in the hole, I did two things.
#1 is that I unlinked my credit card from my ride-sharing apps. Instead, I started paying cash and $200 a month for tutoring. If I was going out, I would split the bill with a friend. If I needed more more, I had to go through the whole process of pulling cash from the ATM. I increased the friction between getting a ride and paying for it. We know that every click, every barrier, changes our behavior. (This is why companies invest so heavily in making your experience “seamless,” They are really trying to make it easy for you to spend.)
We aren’t machines, we don’t carry around an abacus every day adding up what we’re spending in comparison to the service or product we wanted, but what our brains are very good at is counting up the number of times we’ve done something. So #2 I gave myself a limit; I can only use ride-sharing apps two times a week, or only if I’m tutoring (making money off those rides). It forced me to ration my travels. I got a handle on my ride-sharing expenses to the benefit of my savings toward owning a car.
Because of the environmental changes that I did, I was able to make that car purchase a reality. So get a handle on whatever those “small” frequent purchases are for you and change your environment to make it harder to do so.
Those are my tips for you, but I want you to remember one thing. As human beings, we can be irrational when it comes to saving and spending and budgeting, but luckily we know this about ourselves and we can predict how we’ll act under certain environments.
Let’s do that with saving. Let’s change our environment to help our future selves.
In the comment section let me know which of the three hacks you will implement first.
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