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By Jean Chatzky
Sometimes, your mind works best if you play a trick on it. So let’s talk your brain into saving.
If someone offered you a choice between $5 right now or $10 next month, which would you take? Most people would opt for the fiver. Why? Delayed gratification is not our strong suit. When we see what we want and get it quickly, our brain registers pleasure. When we consider something for consumption later – whether it’s a chocolate cookie or cold hard cash – the pleasure is dampened.
This, in part, explains why the rate of savings in this country is 4.4% as of July 2013, less than half of what it should be. How do you save more, when your brain is working against you? You play tricks on it, of course. Below is a sampling of strategies that have proven effective.
Make not saving hurt (a little)
Human beings hate losing money – twice as much as they enjoy gaining an equal amount. And so we’ll go to great lengths to avoid it. In behavioral finance parlance, this is called “loss aversion.” Use it to your favor by setting a penalty that makes missing your goal both expensive and uncomfortable. So say you want to save 10% of your income each month. If you miss the mark this time, you have to give 10% of your income to charity. The charity you select is key – if you’re an avid environmentalist, and you pledge money to EarthShare, coughing up that 10% won’t be too painful. But if you pledge to give money to a group you despise – say you’re a Democrat and you have to support a Republican candidate, or vice versa – you’ll be more likely to stay on track.
Find a saving buddy
We all need someone who can keep us on track when we get a little reckless. Choose wisely: You don’t necessarily want to pick a family member or close friend, because they may love you too much to make failing painful for you. Instead, settle on someone you’re interested in impressing, and who has the personality to hold you accountable.
Lock up your funds
Save in vehicles that make it hard to get your money back, so you’re essentially locking it up and throwing away the key – at least for a set period of time. 401(k)s and IRAs require you to wait until age 59-½ to take distributions, unless you want to pay a big penalty (loss aversion comes into play, again). College and health savings accounts have similar penalty structures and certificates that charge a penalty for early withdrawal work, too.
Picture yourself richer
Hard to stick with because they’re not tangible. When you’re saving for retirement, or the credit card bills, you may see your balances go up or down, but the pile of loot you’re amassing doesn’t have much of an impact on your day to day life. (And in fact, when it does – when you’re pinching pennies to save more – the immediate impact could feel negative). The solution may be as simple as drawing a picture, believe it or not. Mark Murphy, the author of Hard Goals: The Secret to Getting From Where You Are to Where You Want to Be, conducted an experiment with a group of employees at a healthcare company, asking them to draw a self-portrait of how they felt now, and then another of how they’d feel if they were given $500,000. Seeing themselves less anxious and more carefree actually helped them emotionally connect to their goals. You can replicate the same experiment at home.
Divide to conquer
Most people don’t have a single savings goal. They have many. A down payment. Furniture. Vacations. Muddling the money together makes it tougher to reach all of these objectives simultaneously. That’s because when you put, say, $50, into your savings account you consider it $50 toward your down payment and your furniture and your vacation instead of $50 toward just one of those goals. Mentally, you translate that $50 to $150, even if you don’t realize it. So make your saving very deliberate by earmarking money. That means having a college savings account, a vacation account, and an emergency savings account. And keep them all in one financial institution, which should eliminate or reduce fees.
Alliant can help you to implement the savings methods that Jean discusses above…
Alliant Health Savings Account (HSA)
With an Alliant Health Savings Account, you can deposit funds to pay for current or future medical expenses. Funds used for qualified medical expenses, including dividends, are tax-free. Unused funds remain in the HSA year after year, earning tax-deferred dividends.
Alliant Certificate Accounts are flexible and offer above-market dividend rates.
Alliant Supplemental Savings Accounts
You can have a Supplemental Savings account earmarking funds for a specific purpose like college, a vacation or your emergency fund. And you can easily set up an automated monthly transfer from your Alliant Checking or Savings account to make it even easier to save. Learn more here.
If you use Direct Deposit for your paycheck, you can have the deposit split so that part of each paycheck is automatically deposited into your Alliant Savings account.