With inflation high and money tight for so many of us, there’s never been a better time
to re-examine how we’re managing our finances and to make some moves to save
more. Some 61% of Americans — 203 million people — are living
paycheck-to-paycheck, and 13% of us are spending more than we earn. Not only is this
causing us stress in the here and now, but it’s also leading to lasting regrets for the
future. Nearly 70% of Americans have financial regrets, including not saving soon
enough for retirement, having credit card debt, and not having an emergency fund.
The easy part, of course, is recognizing that we need to change our habits. The more
challenging part is making the changes and then actually sticking to them. Researchers
may have an answer. Hint: It has to do with thinking small. A study from the University
of California, Los Angeles, and the University of London (published in the INFORMS
journal, Marketing Science) applied a behavioral finance trick known as “mental
reframing” with success. They conducted a study with 2,000 customers of a personal
finance app that allows users to save and invest small amounts of money. New users
who signed up for a recurring deposit program were randomly offered the choice of
committing to monthly deposits of $150, weekly $35 deposits or daily $5 deposits.
Here’s what happened: Savers were more likely to commit to — and stick with — a
personal savings regimen focused on smaller, daily amounts over the large, intimidating
per-month goal. In fact, quadruple the number of people chose to enroll in the recurring
deposit program when given the $5-a-day option versus the $150-a-month savings goal.
The appeal of the smaller savings option also leveled the playing field between low- and
high-income consumers. When presented with the $150-a-month savings program,
higher-income consumers signed up at a rate of three times that of lower-income
consumers. When deposits were framed as $5 a day — which also gets you to $150
after a month — the participation gap was completely eliminated.
Perception — And Convenience — Matters
It’s not a huge stretch to see why breaking down larger-dollar goals into bite-sized
chunks is more digestible. Big numbers — like saving $1 million for retirement — can
feel daunting, even when we fully know amassing enough money for retirement should
take decades (and also depends on the investment growth of the money that you
save.).
One thing that keeps a lot of us on the sidelines is how we measure the opportunity cost
of those dollars we don’t have to spend now. Putting away a dollar for tomorrow means
one less dollar to spend today. However, the study’s authors demonstrate the mental
calculation of giving up $5 a day is much easier to overcome. It’s a comparatively small
sacrifice (giving up a snack or magazine) than mustering up the resolve to part with
$150 all at once.
Reframe Your Savings Goals
If you’re facing a savings goal that seems insurmountable, cut it down to a less
intimidating size with some simple math:
Save $8 a day to wipe out a $500 credit card balance: Stop letting that lingering
balance give you indigestion. You can knock it back to $0 in two months for just the cost
of a daily sandwich.
Save $11 a day to amass a $2,000 emergency fund: Sock away your spare dollars for
six months, and you’ll be sitting on a healthy $2,000 cash cushion to soften the blow of
any unexpected expenses. Need longer to come up with that amount? A smidge over
$5 a day gets you there a year from now.
Save $17.80 a day to max out your IRA: The IRS allows you to contribute a maximum
of $6,500 a year to a Roth or traditional IRA. (It’s $7,500 if you’re over age 50). You’ll
have to save $540 a month to do it in 12 months.
Grab All of Your Matching 401(k) Dollars
And while we’re talking retirement, pretty much the easiest — and most profitable —
thing you can do is to make sure you’re taking advantage of any 401(k) (or other
retirement plan) dollars your employer is offering. Many employers match 50% on the
dollar up to a certain contribution limit — that represents a guaranteed 50% return on
your money. Plus, it’s free money. How much? Well, say your employer — like many
— is matching 50% of contributions up to 6% of your salary. If you’re making $75,000 a
year, you need to contribute 6% ($4,500) in order to qualify for a 3% ($2,250) match.
That $4,500 works out to about $12.30 a day, or $173 every bi-weekly paycheck. Just
remember that if you’re contributing to a traditional 401(k) (instead of a Roth) that
money comes out of your paycheck before taxes take a bite. So that $173 will feel like
even less. And, the best part about this is that you can set it and forget it — 401(k)s
and other similar retirement accounts are so effective because the money comes out of
your pay before you can see it, touch it, or spend it. PS: If you’re offered a Health
Savings Account through work, there may be incentive dollars for participation there,
too. Make it a point to grab them as well.
Automate For Even More Savings
Finally, before you wrap — take that automatic 401(k) magic and apply it throughout
your life. Perhaps you have a credit card or car payment that’s scheduled for automatic
bill pay, and you’ve seen that it’s super convenient. You can do the exact same thing
with your savings, and every month (or week, your choice) you can have a set amount
of money automatically moved from your checking account into a savings account. It
happens without you having to manually move money, which means your savings will
accumulate without you ever having to lift a finger.
Think about it: Wouldn’t it feel nice to ring in the new year without a balance on your
credit card from purchasing holiday gifts? You can get there! Figure out roughly how
much you’re going to spend on the holidays, and divide the amount by the number of
months (or weeks) you want to give yourself to reach the goal. Then, you’ll set up an
automatic transfer of that exact amount to go into a dedicated savings account. Before
you know it, the money will be there for you when you need it, all because of your
bite-sized savings goal. And if this sounds like something you’d like a little help with,
check out the Finance Fixx small group coaching program, where a dedicated coach
and a team of accountability partners will walk you through it, step-by-step.