How We Can Nudge Ourselves To Save More
Lately, I’ve been reading more about the psychology of poker, and how it can help with navigating uncertainty and making good choices under pressure. The game is an excellent metaphor for several facets of life in which we handle the unanticipated. One that comes to mind is our financial savings. In a time where the uncertainty of simply existing is more apparent than ever before, it frightens me to know that the majority of North Americans are not financially prepared for the unexpected.
Nearly half of all Canadians between ages 18 to 44 don’t have money set aside to cover emergencies.1 Many are living paycheque to paycheque, as 39% of Americans would be unable to pay an emergency expense more $400, and would be forced to use withdraw their retirement savings, incurring a financial penalty.2 While behavioral science has focused a great deal on encouraging long-term saving habits, I wonder to what extent we can encourage saving behaviors in the short term.
The benefit of short term savings
Short term savings are increasingly recommended by financial advisers and policymakers.3 An emergency fund is a savings account dedicated to unexpected expenses—ideally 3 to 6 months (sometimes up to 1 year) of living expenses.4 Emergency funds boost our feeling of financial safety which helps us make better financial decisions. Specifically, experts from Harvard, Yale, and Brigham Young University say this type of savings helps us overcome mental accounting — which is when we value economic outcomes in a way that makes us susceptible to irrational decision making.2
References
- Advisor’s Edge. (2019, January 8). Many Canadians lack a financial plan for emergencies | Advisor’s Edge. https://www.advisor.ca/my-practice/conversations/many-canadians-lack-a-financial-plan-for-emergencies/
- Kurt, D. (2020, March 27). Emergency Funds and New Ways to Get One. Investopedia. https://www.investopedia.com/terms/e/emergency_fund.asp
- Fowler, J. (2020, April 9). Why An Emergency Fund Is Important. Investopedia. https://www.investopedia.com/financial-edge/0812/why-an-emergency-fund-is-important.aspx
- Dixon, A. (2019, July 1). Survey: A Growing Percentage Of Americans Have No Emergency Savings Whatsoever | Bankrate.com. Bankrate. https://www.bankrate.com/banking/savings/financial-security-june-2019/
- Loudenback, T. (2019, June 26). Americans think the economy is tanking and a recession is just around the corner, but nearly 30% don’t have the cash to get through it. Business Insider. https://www.businessinsider.co
- Beshears, J., Choi, J. J., Iwry, J. M., John, D. C., Laibson, D., & Madrian, B. C. (2020). Building Emergency Savings through Employer-Sponsored Rainy-Day Savings Accounts. Tax Policy and the Economy, 34, 43–90. https://doi.org/10.1086/708170
- Canada, F. C. A. of. (2017, March 21). Setting up an emergency fund [Education and awareness]. Aem. https://www.canada.ca/en/financial-consumer-agency/services/savings-investments/setting-up-emergency-funds.html
- Arnold, C. (2015, October 23). Why Is It So Hard To Save? U.K. Shows It Doesn’t Have To Be. 88.5 WFDD. https://www.wfdd.org/story/why-it-so-hard-save-uk-shows-it-doesnt-have-be
- O’Donoghue, T., & Rabin, M. (1999). Doing it now or later. American Economic Review, 89(1), 103-124.
- Mischel, W., Ebbesen, E. B., & Raskoff Zeiss, A. (1972). Cognitive and attentional mechanisms in delay of gratification. Journal of Personality and Social Psychology, 21(2), 204–218. https://doi-org.ezproxy.lib.ucalgary.ca/10.1037/h0032198
- Goda, G. S., Levy, M. R., Manchester, C. F., Sojourner, A., & Tasoff, J. (2020, February 11). Auto-enrollment changes who is a passive saver. VoxEU.Org. https://voxeu.org/article/auto-enrollment-changes-who-passive-saver
- Burke, J., Luoto, J., & Perez‐Arce, F. (2018). Soft versus Hard Commitments: A Test on Savings Behaviors. Journal of Consumer Affairs, 52(3), 733–745. https://doi.org/10.1111/joca.12170
- Hershfield, H. E., John, E. M., & Reiff, J. S. (2018). Using Vividness Interventions to Improve Financial Decision Making. Policy Insights from the Behavioral and Brain Sciences, 5(2), 209–215. https://doi.org/10.1177/2372732218787536
- Beshears, J., Choi, J. J., Harris, C., Laibson, D., Madrian, B. C., & Sakong, J. (2020). Which early withdrawal penalty attracts the most deposits to a commitment savings account? Journal of Public Economics, 183, 104144. https://doi.org/10.1016/j.jpubeco.2020.104144
- Thaler, R. H., & Benartzi, S. (2004). Save More TomorrowTM: Using Behavioral Economics to Increase Employee Saving. Journal of Political Economy, 112(S1), S164–S187. https://doi.org/10.1086/380085
- Engen, R. (2019, September 12). Save More Tomorrow: The Procrastinator’s Guide To Saving Money. https://boomerandecho.com/save-more-tomorrow-procrastinators-guide-saving-money/
- Sullivan, M. (2019, February). Auto-enrolment grows globally. IPE. https://www.ipe.com/auto-enrolment-grows-globally/10029254.article
- Cribb, J., & Emmerson, C. (2020). What happens to workplace pension saving when employers are obliged to enrol employees automatically? International Tax and Public Finance, 27(3), 664–693. https://doi.org/10.1007/s10797-019-09565-6
- Young, J., & Clark, J. (2018). Automatic enrollment: The power of the default. 16.
- Kagan, J. (2019, November 18). Pay Yourself First. Investopedia. https://www.investopedia.com/terms/p/payyourselffirst.asp
- Sethi, R. (2024). Automate Your Finances Using Technology and Psychology. https://www.iwillteachyoutoberich.com/automate-your-personal-finances/
- Moka. (2020). Moka | Save more. Spend less. Invest smarter. The app previously known as Mylo. https://moka.ai/en/
- Hershfield, H. E., Shu, S., & Benartzi, S. (2020). Temporal Reframing and Participation in a Savings Program: A Field Experiment. Marketing Science, mksc.2019.1177. https://doi.org/10.1287/mksc.2019.1177
- Steele, S. (2017, April 21). Does Automatic Saving Really Work? Banking Made Awesome. https://www.chime.com/blog/does-automatic-savings-really-work/
About the Author
Kaylee Somerville
Kaylee is a research and teaching assistant at the University of Calgary in the areas of finance, entrepreneurship, and workplace harassment. Holding international experience in events, marketing, and consulting, Kaylee hopes to use behavioral research to help individuals at work. She is particularly interested in the topics of gender, leadership, and productivity. Kaylee completed her Bachelor of Commerce degree from the Haskayne School of Business at the University of Calgary.
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