Saving money should be easy.
You just take some of the money you earn and put it away somewhere and simply don’t spend it. Then you repeat.
Yet most Americans are not saving for a rainy day or retirement. One third of Americans have less than $1,000 in savings and investments and nearly two-thirds have less than $25,000, according to non-profit Employee Benefit Research Institute and Greenwald and Associates.
Why is saving so hard?
According to behavioral economist Shlomo Benartzi, there are three reasons: We have present bias, loss hurts and we’re a little lazy.
Present bias basically means that we prioritize our present needs over our future needs. It’s easy to imagine ourselves doing responsible, dutiful things like saving money in the future, but when the future becomes the present, we don’t want to. Self-control will not be a problem tomorrow, we tell ourselves, it’s only a problem right now.
In the present, we experience saving as a loss of money we would have spent instead. Loss is very painful and we tend to avoid it.
To illustrate this point, Benartzi points to an experiment with two groups of monkeys. One group received one apple and was perfectly happy. The second group received two apples, and one was immediately taken away. This group wasn’t happy; this group was mad. Even though both groups wound up with one apple, the second group had experienced loss and they didn’t like the taste.
That saving money tends to take a little more effort than spending compounds the problem. Whether it’s investing or even the simple action of clicking a few boxes to put money into your savings account.
Take this example from Benartzi: Organ donation is optional in both Germany and Austria, two fairly comparable countries. Germany asks drivers to check a box if they want to donate when applying for a driver’s license. Only 12 percent do. Austria asks them to check a box if they do not want to donate. Only 1 percent check this box. The simple step of having to check a box makes a big difference in how many organ donors each country has: 12 percent versus 99 percent. It’s unlikely that kind of difference is simply coincidence among the populace.
In terms of finances, having to check lots of boxes or go through a rigorous decision-making process to set up a 401k plan or IRA may be enough to stop many people from saving.
So how can these three issues be avoided so you can save the easy, painless and lazy way?
1. Do it tomorrow
The easiest way to start saving without cutting spending is to take every raise, bonus, or additional income and save it. That way you’re not cutting out anything you already have, so you don’t have to experience loss.
2. Don’t make it obvious
Send just $50 every two weeks into your savings account and you’ve got $1,250 by the end of the year and that’s $12,500 in 10 years for the cost of about two or three dinners out a month. That may not seem like much, but think of that one-third that has less than $1,000 saved.
Plus, you can invest that $1,250 after the first year in a simple mutual fund and take advantage of compound interest. Or once you’re used to the $50, increase by $25 increments. Before you know it, you’re saving easily.
3. Make it automatic
Whether it’s that extra income, or you just want to start saving in the future, make it automatic. Either your employer or your bank can help with this. If you use direct deposit, ask that a certain portion of your check go to your savings account each pay period. Or ask your bank to transfer a set amount of money into your account on or right around when you get paid. That way it’s gone before you see it.
Whatever you do, don’t avoid these steps because you think they’re not enough. When it comes to saving, something is better than nothing.