Why is saving so difficult? And why do we put away too little for retirement? World famous behavioural economist Dan Ariely knows the answers – and he shares some money-saving tips with us, including how you save more with a selfie.
Why is saving so difficult for us?
There are two main factors that make saving difficult. The first is the issue of “now versus later”: when we want something, like a bike, we want to have it right away. Second, is the issue of “concrete versus abstract”: the bike is concrete, it’s right in front of us. By contrast, saving is something abstract, something invisible. People are not good at thinking in long-term and abstract ways. We discount the future to a very large degree. We act irrationally – in predictable ways.
Are there any tricks we can use to overcome our irrationality?
There are. Every time we decide we need to eat less, spend less time using our smartphones or more time working out at the gym, there is a fair risk that we will fail. Not always, of course, but fairly often. The good news is that we can also make decisions that will last, especially when these decisions involve money, for example, we can tell our bank to immediately transfer 10 to 15% of each salary payment credited to our current account to our savings account. Automatic deductions – that’s a very useful trick.
Many people earn just enough to get by. What would you advise them to do?
We conducted experiments in Kenya with people who live on about USD 10 per week. And you know what? They were able to save. Of course, they didn’t put money aside for retirement, but rather for a rainy day. I’m not talking about the poorest people in the world, but if they can save, then most of us can save, especially in the Western world.
You already advised us to set up automatic bank transfers. Do you have another practical tip?
We can all reduce our spending and borrow less. Ask yourself what you can do without. Go through your bank statements and for each purchase ask yourself this question: did it make you happy? If the answer is no, then don’t spend money on this type of purchase again in the future. Ultimately, in life money should be used in a way that makes us as happy as possible – now and in the future.
When you say we should borrow less, do you mean it’s a good idea to throw away our credit cards?
I’m a big fan of prepaid debit cards. They have the benefits of credit cards in that we don’t have to carry money around, but they also do not give us the feeling that we have an unlimited amount of money – and they help us to constrain ourselves. Make a budget for special expenditures – a concert, for example, or a nice meal out with friends – and then every Monday load the amount on a debit card. That way, you’ll see every day how much you have left for the rest of the week.
How do you get people to save for their retirement?
Here’s a helpful trick: take a photo of yourself and use an app to age it. People who imagine themselves when they are old will develop greater empathy for their older selves – and will then save more. A more extreme version of this would be to use the photo as your screensaver. I think this would really motivate people to save a lot. And don’t worry, everyone looks bad in selfies. I made a photo of myself like this. I’ll send it to you.
What can employers do to motivate their employees to think more about retirement?
Financial incentives work, of course. For example, if the employer doubles employees’ savings contributions. But it also helps to show employees how others save. And in the US, the so-called “Save More for Tomorrow” programme also works. Under this programme, employers ask employees to put away more for retirement by having them commit to saving a higher percentage for retirement every time they receive a salary increase. We also found that people generally save more for retirement if they talk about it with their significant other. So talk more with your partner about how you would like to save more.
It is often said that Millennials are bad with money. Is this a myth or reality?
An absolute myth! I feel for the Millennials. The likelihood that they will be able to afford to buy a home in a larger city is, unfortunately, very small. Just imagine, in my generation people married at age 25 and took out a mortgage. Millennials live in a different economic world. They don’t have a lot of the opportunities that my generation had. If real estate prices were still at the same levels as in the 1980s and we gave every Millennial a mortgage, they would behave differently than the way they do today.
Be honest, how often do you make irrational decisions?
Often. But we have to distinguish between three types of decision: small, big and habitual decisions. We make small decisions, for example, in a restaurant when the dessert wagon comes around. All of us usually take something, even though we didn’t really want to – and I’m no better in this regard than anyone else. That’s not so bad. What counts are the big decisions. Here, we have to slow down and really think about them, especially major financial decisions, like buying a home. And habits are important too. While these are small individual decisions, they add up to a lot. Habits are an opportunity to improve ourselves. Ask yourself: what habits give you satisfaction and happiness in life and which ones stand in your way?
Dan Ariely, 50, teaches behavioural economics and psychology at Duke University in the US. His books are best-sellers and his TED talks are watched by millions of people. He has the reputation of being a creative and unconventional researcher who has looked into people’s search for meaning by using Lego figures. He recently published a new book, co-authored with lawyer and comedian Jeff Kreisler: “Dollars and Sense: How We Misthink Money and How to Spend Smarter”.