If You Don't Have a 401k, Here's a Great Way to save More Money
Unleashing the subtle power of "soft" commitments
Life is not always a matter of holding good cards, but sometimes, playing a poor hand well.”
― Jack London
When used properly, workplace retirement plans like a 401k are a fantastic tool for saving money and ensuring you keep it saved.
Economists refer to these retirement accounts as “hard” savings commitments because they are designed to make it difficult to withdraw funds early.
But what if you don’t have access to a 401k or workplace retirement plan? Can you still hit your retirement savings goals?
Yes, you can.
One way to help you save enough without access to a 401k is to use “soft commitment” strategies.
What are soft commitment strategies?
They are simply a commitment to saving but no mechanism like early withdrawal penalties preventing you from cashing out your savings too early.
Can simply making a commitment—but with nothing forcing you to follow through—actually help you save more money?
That is what the researchers in a 2014 study wanted to find out. They conducted a six-month study comparing these soft and hard commitment savings strategies to answer three questions.
Will more people opt into a soft commitment savings plan?
Are impatient people more likely to use a soft commitment savings plan?
After six months, will soft commitment savings plans lead to more total savings than hard commitments?
Participants in the study were given three options to save money—which all provided the same guaranteed rate of return for the purposes of the study.
An account with zero restrictions on taking out money
An account with a hard commitment, which did not allow withdrawals for at least 6-months
A “Soft” commitment account, which had zero restrictions on withdrawals but nudged people into keeping their money saved.
People using the soft commitment account were given the following prompt when signing up:
“We imagine this will be of interest to you because you told us before that you would like to save more. Think about the reasons you have to save.”
Then, people using the soft commitment account were asked to describe their savings goal in one word. Finally, they were asked to describe in one word how it would feel to achieve their savings goal.
In a past article, I discussed how creating a vivid connection between a savings goal and the feelings of achieving that goal can help create a feeling of financial optimism, which can help you save more money.
The researchers in this study were drawing on similar ideas to test if these prompts would help people save.
Here’s what they found.