Dr. GoodCents: Get SMarT – The Save More Tomorrow Program

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shutterstock_112957657A clinical psychologist with nearly 30 years of experience, Dr. Shapiro is ready to answer questions, offer advice and share strategies to help you alleviate the mental stresses of money management. Send your question to GoodCentsDr@gmail.com and it may be answered in an upcoming column!

Financial sense depends on time sense–it’s all about understanding how your life flows through time. Specifically, it’s about the relationship between your present and your future.

Time and Money

In a day to day way, the task of figuring out what to do with our money requires us to wrestle with the eternal conflict between the present and the future. Should we enjoy ourselves today or invest in a better tomorrow? This is the bottom layer of our decision-making in stores and on Internet shopping sites, when we choose whether to buy a product or let the purchase go.

Here’s one thing that psychological research has definitely proved: People are smarter when they decide what to do in the future than when they decide what to do in the present. When asked about their intentions for future behavior, people typically say they will do the right thing, whether this means working hard, eating healthily, exercising, or being kind to their spouse. When asked about their intentions for the next hour or day, many people acknowledge that their intention is to surf the net until their boss comes back, then go out with co-workers for pizza and beer. In the future we plan to exercise self-control, but in the present we want self-indulgence.

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There’s a big potential problem with this aspect of how the mind works: Our actual behavior occurs in the present, when we often give in to our impulses. The future, for which we reserve our best intentions, is like the horizon, which moves away from us as we toward it.

Kicking the Can Down the Road

This problem has serious consequences for many people’s financial health. When asked, most people say that saving money is important, and they have every intention to do so—in the future. But not today, because there’s a great special on gas grills, the kids really want that trip to a water park, and of course there’s always a new electronic must-have coming out.

There are two possible solutions to this problem. We can grit our teeth and force ourselves to do the right thing now, using sheer force of will and dealing with whatever feelings of deprivation come up. This is a reasonable and honorable plan, but it’s a difficult one.

Happily, two clever behavioral economists named Richard Thaler and Shlomo Benartzi invented a smarter, easier way to connect our best intentions with our actual behavior. Their strategy is to work with the human tendency to project our best intentions into the future, rather than trying to overcome this tendency.

The Save More Tomorrow (SMarT) Program

Insufficient saving for retirement is a perennial problem for many people. Even when we work for companies that have 401(K)s, IRAs, and other tax-protected saving vehicles, many of us contribute only pitiful dribs and drabs to these resources for our future. The reasons are understandable: Things always come up in the present, and rather than stressing out about it, we promise ourselves to step up our retirement saving in the future.

Thaler and Benartzi came up with a simple but effective idea. In the SMarT program, employees leave their current paychecks alone, but they pre-commit to having any future increases in their pay automatically funneled into their 401(K)s or IRAs. When the day of their raise or cost-of-living increase arrives, their paychecks remain the same, and their saving increases. This way, employees are not hit with a decrease in available funds, and their savings rate ratchets up over the years.

If employees change their minds, they can opt out of the program at any time. There is no coercion involved. If people do nothing, their pre-commitment remains in force, and this is what usually happens, because the default mode is always the easiest path to take.

The SMarT program works. Studies have shown that SMarT more than quadruples the retirement savings rate of people who participate, with average rates moving from 3% prior to the program to 14% after it is in effect for a few years. And 14% is about what people need to save if they want to have the same standard of living in retirement as they have during their working years.

Lock Yourself Into Saving

If you don’t have this program at your job, and most people don’t, how can you use its insights into saving? The vital idea is pre-commitment: deciding on a disciplined plan of action for the future, and locking yourself into this plan, so you don’t back out when the future finally arrives and becomes the present.

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This could mean sending something in writing to your payroll department, in advance of a salary increase, so the extra money goes right into your retirement account. Or, if this is not feasible, you could put something in writing with your significant other, or just with yourself, promising that increases in income, when they arrive, will be devoted to building your financial future, starting at that moment.