Our pursuit of happiness and financial security is often thwarted by simple human tendencies like procrastination or inertia. Fortunately, smart scientists have found ways to work around these obstacles.
Studies of psychology and human behavior have often shown how we don't always make smart financial decisions. The field of behavioral economics offers countless examples of people driving across town to save $25 on a $100 appliance, but not bothering to save $25 on a $1,000 television. And when it comes to major financial matters, such as saving for retirement or refinancing our mortgage, we often just put such questions off. University of California psychology professor Sonja Lyubomirsky explains, "We’d rather avoid doing things now that make us feel uncomfortable, even though we stand to gain in the long run."
Given all that, you might think we're doomed. But some of the same researchers studying the ways we foil ourselves have also devised strategies to overcome our counterproductive inclinations. Professors Richard Thaler of the University of Chicago and Shlomo Benartzi of U.C.L.A., for example, have come up with a brilliant "Save More Tomorrow" program, to address the problem of people not saving enough for retirement, nor increasing their contributions sufficiently.
In the program, which is designed to be offered by employers, people agree ahead of time to contribute to a retirement plan, and to have their contributions automatically increased regularly, corresponding with when they receive payraises. The first implementation of Thaler and Benartzi's system involved a midsized manufacturing company; over 28 months, the average saving rates of those in the program increased more than threefold, from 3.5% to 11.6%. Interestingly, the minority of employees who opted not to enroll in the plan had originally saved, on average, more than those who signed up -- 5.3% of their income, as opposed to 3.5%. But after the 28 months, the longtime savers only increased that rate to 7.5%, far less than the participants' 11.6%.
The seemingly more responsible savers had been lapped by the seemingly less responsible ones, thanks to a program that automated increases. Part of the program's effectiveness is that it asks employees to increase their contributions when they get raises -- but asks them to do so three months before the raises take effect. Thus, though they're agreeing to reduce their take-home pay, they won't feel any pinch from that decision anytime soon. And once they're in the program, inertia and procrastination can't derail their retirement savings, because their contributions and increases will be handled automatically.
If such a plan isn't offered at your workplace, ask for it. If need be, you can execute your own version by entering reminders in your calendar to increase your contributions, asking an organized friend to remind you, or using an email reminder service.
You may also be able to automate contributions to your other savings and investment accounts. Your employer, for example, may be able to automatically send an electronic payment from your paycheck to a bank or brokerage account each month. Your bank may be able to regularly and automatically send a preset sum to a mutual fund account. At the very least, if you're not yet participating in your company's retirement plan, fill out the paperwork to do so and get started.
One way or another, aim to keep upping your retirement plan savings; socking away 15% of your income as soon as possible is a good goal to shoot for. The old rule of thumb was to save 10%, but with health-care costs skyrocketing and pensions disappearing, we'll need more money to retire on. And if you're starting late, even 15% may not be enough.
Our human weaknesses can befoul our financial futures, unless we recognize and outsmart them. Vow right now to save more tomorrow -- and then sit back and enjoy today.
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.