Why Is It So Hard to Save for Tomorrow?

Americans have trouble saving. According to the Federal Reserve, half of Americans had less than $400 in savings in 2016.

Data related to retirement savings is just as bleak. About 66% of millennials haven’t saved anything for retirement. This means more financial insecurity for us today and less economic growth for us tomorrow. What happens when a household without savings faces the inevitable unanticipated cost of a new muffler or a broken cell phone? What happens to the economy when a whole generation struggles to afford a home or pay for their children’s education?

The Source of the Problem

Economic factors or a consumer-driven culture are often blamed, but over the past 20 years, emerging research in the field of behavioral economics tells us that this isn’t the whole story. One of the cornerstones of behavioral economics is the idea of hyperbolic discounting. Said plainly, it’s the idea that we put way too much emphasis on rewards in the moment – and struggle to place value on rewards that are delayed.

“The choice to save is a choice between current consumption and future consumption. In the battle between a current trip to the Caribbean versus funding a 401(k), unfortunately, with many people the islands win,” Robert Johnson, a professor of finance at Creighton University’s Heider College of Business and former president and CEO of the American College of Financial Services, says.

Logically, saving for tomorrow is a no-brainer. Consider two people. One is 20 years old and the other is 40 years old. Imagine that both of them want to retire at age 65 with $500,000 in retirement savings. The 20 year old has 45 years to save and the 40 year old has 25 years. Assuming they both invested in the S&P 500 and that market index would continue to return the 9.8% it historically has, the 20-year-old would only need to set aside about $1.65 per day to reach their goal. On the other hand, the 40-year-old in our example would need to save almost $13 dollars per day to reach their goal.  That’s almost eight times as much as if the 40 year old had started saving at a young age.

So why is it so hard for us to overcome hyperbolic discounting and adopt good savings habits?

Your Present Self vs. Your Future Self

“One of the biggest behavioral biases that humans succumb to is the bias toward immediate gratification over delayed gratification. That is, our present selves tend to win over our future selves,” Johnson says.

In his fun and approachable book, Dollars and Sense, Duke University Behavioral Economist Dan Ariely discusses steps we can take to address our difficulty delaying gratification.

“We think of our future self as a somewhat separate person, so saving for the future can feel like giving money away to a stranger rather than giving it to ourselves,” Ariely says. This lack of connection and empathy makes it hard for us to overcome our bias toward immediate rewards.

Ariely goes on to say that this conversation doesn’t have to be an opportunity to beat yourself up for bad behavior. Imagine a conversation between your older self and your younger self while you’re standing in line at the coffee shop, “Hey, Past Me, you’re great for getting me this triple-whip iced venti cap every morning before work! Awesome idea! Instead of that, though, what would be even better is if we leave ourselves an extra $250,000 in that 401(k).”

This approach can work for major purchases as well. If you have a dream home you aspire to own, keep a picture of it near your computer, in your wallet or anywhere else where you may be tempted to spend, so that it may serve as a reminder of your longer-term goals.

Automate So You Don’t Miss the Money

Another strong tool for helping us rise above temptation is to force ourselves into savings plans that we don’t have discretion over. Opting into employee-sponsored 401(k) plans takes choice away from us and can help put you on a track toward retirement that you know will be successful.

“People should try and automate as many financial decisions as they can. A particularly sound way to do this is to agree to have a specific amount (or better yet, percentage) deducted from your paycheck every month and put into a retirement account. If we are automatically enrolled in a retirement plan, inertia and the inherent laziness of people tend to work in our favor,” Johnson says.

For shorter term goals, there are savings apps available like Qapital or BoostUp (our savings app) that can be used to help put you on track toward a specific savings goal like a down payment for a home. Some of these apps, including BoostUp, are free to use. By using financial tools that add discipline and remove choice, we can curate our financial world so that there is a bit less temptation.

Johnson suggests utilizing apps that automatically round up purchases and save the change for you, like Acorn, which puts the money into an investment account. By doing this, you’re taking the decision to save out of your hands and automating it. Before your next splurge, take a moment to have a conversation with your future self. Imagine what decision they would want you to make, and make it a habit to build a connection with the real-world outcomes you’ll experience based on your decisions today. Use apps and other tools to add structure and discipline to your world and think about saving daily, whether it’s $1.65 or $13, so that your future self can enjoy spending as well.

What are some barriers that are affecting your own ability to save? Get the conversation started with fellow readers in the comments section below!

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