Use This Simple Trick to Crush Your Savings Goals
Researchers discover a new way to “nudge” people to save more money
The internet is full of “bumper sticker” financial advice.
That is advice that has been so oversimplified that it could fit on a bumper sticker.
“Save 10% of your income” is classic bumper sticker advice.
This type of advice is so watered down that it has no relevance to most people’s lives. The best financial advice is delivered in a way to help the person receiving that advice actually follow through.
Today, I want to review research that discovered a psychological hack that anybody can use to start saving more money.
A new nudge
John Beshears from Harvard Business School and three other co-authors published a 2021 study titled “Using Fresh Starts to Nudge Increased Retirement Savings.”1 The word nudge instantly caught my attention as it is a reference to one of the sacred texts in behavioral finance, “Nudge,” written by Richard Thaler.
For those unfamiliar, a nudge is essentially a psychological “hack,” for lack of a better term, that makes it easier for people to make better decisions.
A perfect example of a personal finance nudge is employers forcing their workers to “opt out” rather than “opt in” to retirement plans. Since most people go with whatever the default option is, making “opt-in” the default will mean many more workers end up contributing to a retirement plan which makes them better off.
A good nudge understands the human mind is irrational but finds clever ways to push them towards a more rational outcome.
This new paper is exciting because it discovers a simple nudge that will make it easier for people to save money.
“Fresh starts” make it easier to save money
There are certain times when people are more motivated to pursue meaningful goals.
These moments often feel like a new beginning, such as new years’ day, a birthday, the first day of spring, the first day of a new school year, or even the first day of the month.
The researchers mailed a form to 6,082 University employees, allowing them to increase contributions to savings plans immediately or at a specific future date like a birthday or the first day of spring. These future dates were framed as an opportunity for a “fresh start.”
Tieing together the opportunity to save more money with the concept of a “fresh start” led to a significant increase in savings by the employees. How much of an impact did the fresh start saving have?
The employees who received the fresh start framing were 50% more likely to start saving money.
The fresh start group also saved 26% more money than the control group.
The researchers provided four reasons why they feel this savings nudge was successful:
Framing the fresh start at a future date feels more achievable because they don’t have the pressure to start immediately.
Choosing a future date associated with new beginnings has been shown to increase motivation and follow through for people to set new goals. Your birthday is a good example, particularly on milestone birthdays like turning 30, 40, or 50.
Choosing a date associated with fresh starts to start a savings plan encourages you to think about the big picture and not focus on how difficult achieving this goal might be. This prevents you from psyching yourself out before you even start.
On a date associated with fresh starts, people are more optimistic about their future and ability to take action. Framing a savings goal as a fresh start can act as the cue you need to make you believe that you can do it (which you can.)
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