The question is: Why? Why don’t we make saving a priority? We certainly know that saving money – like eating broccoli and strengthening our core muscles – is good for us. In the latter cases, we listen. Yoga and Pilates have never been hotter. And broccoli now comes as a baby vegetable, precut and bagged, and even in purple. Yet saving for tomorrow is still a largely ignored and unappreciated skill. There are three reasons for this.
One: Saving today is harder. “If you’re having to spend a disproportionate amount of income on food and gas, it’s hard to save,” says Anthony Pratkanis, a psychology professor at the University of California, Santa Cruz, who specialises in financial issues.
Over in our part of the world, food and fuel prices have increased substantially, eroding much of the income growth we’ve enjoyed in the past few years. According to the UN Food and Agriculture Organization, food prices soared nearly 40 percent since last year. Meanwhile, crude oil prices have surged more than five-fold since 2002.
What’s worse, the prospect of still spiralling inflation amidst a current slowing global economy will make it more difficult for already strapped households to save.
Two: Credit became too accessible. For years it was simply too easy to get your hands on money to spend. Banks are eager to extend credit to you if you meet their requirements.
A financial cards study by Euromonitor International reported there were 580 million credit cards in circulation in Asia Pacific last year, a 54 percent increase since 2002. Correspondingly, credit cards transactions has increased 62 percent in the same five-year period.
Another study by the Bank for International Settlements, the bank for central banks, noted that many Asian countries such as Singapore and Malaysia, racked up a 200 to 500 percent increase in credit card usage volume, including the use of cards both to make purchases and to withdraw cash, between 1998 and 2005.
With such easy credit available, why save when you could get that big flat-screen TV today and pay for it with a simple swipe of plastic?
Three – and most intriguing: Saving is, was, and always will be no fun. “Saving money,” explains Jason Zweig, author of Your Money and Your Brain, “doesn't feel good.” Think about it this way: Choosing to save almost always means opting for delayed instead of immediate gratification. “You can buy a pair of shoes today,” says Zweig, “or have a nice retirement 20 years from now.” You’re going to buy the shoes because the pleasure of getting something good today is much greater than the pleasure of getting something good years in the future – even if the reward in the future is bigger.
IF IT’S NOT SHOES THAT make you go mushy inside, it may be technology, or rare books. But that’s not only an intensity you feel, it’s an intensity neuroeconomists can see. In recent years, this relatively new breed of experts in economics and neuroscience have started using MRIs to view the brain as it is making money choices.
When something we want to buy comes into view, they see the pleasure centre firing up as we get a feel-good dopamine rush. Similarly, getting a few dollars today is thrilling – more thrilling, in fact, than getting a slightly larger profit tomorrow. And if you have to wait a few weeks or months for that gain, it will have to be much bigger in order to arouse the same interest in your brain. Things way off in the future – like retirement – don’t jostle the pleasure centre much at all.
“HUMANS, LIKE MOST ANIMALS, have a strong preference for immediate reward over delayed reward. If you offer me $10 today or $11 tomorrow, I’ll probably say I’d rather have the $10 today,” says Zweig. Even bigger numbers don’t seem to make a difference. Financial experts routinely use what-if scenarios to try to encourage people to save more and at a younger age. You’ve probably heard that if at age 20, you put $100 a month into an account earning 8 percent interest, you’d have $527,454 at retirement. If you waited until you were 30 to begin, you’d have only $229,388. Yes, the examples are striking, but by Zweig’s logic, they probably aren’t very effective.
“A reward you get in the distant future has no emotional kick to it. It’s just an abstraction,” he says. “Even if you tell people you’ll have a million dollars 30 years from now, the brain doesn’t get it.”
Which, of course, is perfectly rational. “If tomorrow’s reward is based on promises – which retirement is – the people making the promises might be lying, they might not be around 20 years from now, your goals might change, many things could happen,” says Zweig. “So you have this automatic preference for an immediate reward. And that probably comes from our [hunter-gatherer] ancestors.” Back in those days, food was scarce. Given the choice of eating now or maybe eating more later, the cave folk who chose the latter very likely starved to death.
So the question becomes: Knowing what we know about our money and our brains, what mind games can you play to psych yourself into saving?
Visualise your goals. Let’s say you're 31 and you want to retire in 25 years. The key is to make the goal as concrete as you can, says Zweig. Pick your birthday circa 2033 as the day for your retirement goal. Then ask yourself, What do I want to do when I retire? Do I want a villa in Bali, a yacht to sail the seas in, or a paid-off mortgage? It’s different for everyone. But you’ve made retirement tangible: You have the date. You have the goal. Then you give it a name. It becomes “The Villa in Bali Fund.” You put a little Balinese music on your desktop, or cartoons of the beach – whatever reminds you of your goal. Put your account statements in a manila folder and decorate it with coconut trees.
Sound corny? Sure, but what you’re doing, Zweig says, is building an emotional environment that you can save in. All these things work together to motivate you, and then when you see the pair of shoes, it will be easier for you to say to yourself, This is a choice between shoes and Bali. Suddenly, you can leave the shoes in the store.
Rally your team. Use your friends and family as a way to discipline yourself. Tell them what your goal is, and ask them to remind you if you’re about to spend money on something you won’t need. (Tell them you won’t get cranky and will appreciate the help.) You can even do this on the internet. Dean Karlan and Ian Ayres of Yale just launched a website called stickK.com, which lets you post your goal, notify your friends, and set up penalties if you fail. It worked for both founders, who lost a significant amount of weight by pledging a significant amount of money if they didn’t drop pounds. But you could also use it to build an emergency stash, increase your contribution to your retirement savings, or amass an education fund for your kids.
Break it down. Stephen Brobeck, executive director of the Consumer Federation of America, says that one reason many middle-income families don’t save is that they don’t believe they can come up with big enough sums of money to do it effectively. The fact is, he says, small amounts can be quite effective. Start with your change. “It sounds trivial, but we have story after story of people who accumulated hundreds of dollars that way, realised they could do it, and worked harder to get more,” he says. Then add an automatic transfer from checking to savings account every month.
Finally, recognise that the saving process is actually healing. It makes you feel better – a better person, a better spouse, a better parent – to know that you have something put away for your future. Says Brobeck, “You may have to make sacrifices in the short term, but you’ll feel so much better in the medium to long.
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