5 Tips to Make Saving Fun
5 Tips to Make Saving More Fun
Saving is at its lowest rate on record. Experts predict that by 2060, 15 million retired workers will be living on inadequate incomes.
How can we encourage people to save more?
Behavioural economics is a blend of psychology and economics. One of its leading exponents is David Halpern who heads the Behavioural Insights Team. He and his team spend a lot of his time thinking about how to incentivise us to save more money. Here are some of their most important findings:
When it comes to saving, we thrive on inertia, doing nothing, the path of least resistance. In short, we are lazy.
The brain favours an approach called mental accounting; putting money into various pots which are earmarked for specific purposes – like your grandmother did when they dealt in cash. That means we’re more likely to save for a holiday than save ourselves interest payments by paying down debts.
The now means much more to us than some time in the future – we just want to spend the money today.
Houston, we have a problem. How can behavioural economists help us get around them?
- Use a photo to help visualise your goal
In a study in India, workers were given their pay packet in two envelopes, rather than one. That way they were much more likely to save the contents of one of the envelopes. Add a photograph of their objective to the “saving” envelope and they were even less likely to spend it.
Placing the photograph so the workers had to tear through the photo to open the envelope increased the savings rate still further. Vision boards have been used by successful people for centuries.
- Make saving money more fun
It sounds obvious but making saving cool and playful might well help. David Halpern believes new mobile phone-based technology means it can be done.
Already there are phone apps available which assess your spending habits and siphon off money to a saving account or work as a buffer between you and your wage, drip-feeding cash back into your account when you need it or rounding up your everyday small purchases and putting the excess into an ISA.
- Keep it simple
Research shows we are much more likely to do things if they are easy and friction free. It’s something that’s been applied to pensions in the UK. As from 2012, employees have been automatically enrolled into a workplace pension scheme – described in behavioural economic terms as the default position.
Use the same technique to autosave using a simple standing order from your account each payday.
- Rainy day money
People on low incomes have proportionately less money to save and less of a financial cushion if things go wrong. One idea to help them through the financial shock of the car breaking down or the washing machine going kaput is to create a ‘rainy day’ saving element into their pension arrangements. Always have short and long term savings.
- Save more without reducing your income
This is an idea dreamt up by Nudge Theory guru Richard Thaler at the University of Chicago. It’s called Save More Tomorrow (SMT) and builds on the idea of default. Employees who are enrolled in a workplace pension with initially low contributions sign up to increase them as their pay increases.
The key thing here is at the same time as you ramp up your savings, you never experience a reduction in cash income. In the US which has a similar opt out pension system to ours, savings rates at companies who offer an SMT pension have quadrupled.
Having worked in financial services, including banks, insurance companies and my own IFA practice, for over 25 years, I have seen first-hand how people manage their money. This is why I wrote Yes, Money Can Buy You Happiness to help people feel better and manage their money more effectively.
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