Trick Yourself into Saving Money

Wouldn’t it be great if you could stash more cash without feeling the pain? Turns out you can. The mind games start here

Jean Chatzky
Photograph: Illustrated by Brett Ryder

Loss aversion is also a key reason that 401(k) plans and IRAs are effective savings vehicles. If you pull your money out before age 59½, you pay for it big time: income taxes atop a 10 percent penalty that, combined, can cost you 30 or 40 cents for every dollar.

Unfortunately, IRA contributions are capped at $5,000 a year until you hit age 50, and $6,000 thereafter. And even if you’re maxing out your 401(k) contributions, you may need more to retire comfortably. “Look for places where it’s expensive—or a hassle—to get your money out,” says Brigitte Madrian, an economics professor at Harvard. Pricey parking places include college savings accounts, health savings accounts, bank accounts that charge a monthly fee if your balance falls below a particular level and CDs with a penalty for early withdrawal. Internet banks that don’t have an ATM presence also make sense because it can take several days to access your cash.

In the Virtual Human Interactive Lab at Stanford, people in their twenties and thirties are being introduced to their future selves—or, rather, to avatars that look and move like those young people might 30 or 40 years in the future. After playing with their avatars, testers are asked a series of questions about how much money they plan to save. Those whose avatars are in their midsixties say they’ll save 30 percent more than those whose avatars aren’t aged at all.

Why the jump? “The biggest obstacle in saving for retirement for a 35-year-old is that it’s 30 years in the future,” says David Laibson, a Harvard economist. Try to think about yourself 30 years from now. You don’t know who you’ll be, where you’ll live, what you’ll need—let alone what you’ll want. You’re little more than a stranger. And that can push saving for your future well-being down to the bottom of the priority list. But when you see your- self at that age, the need to protect yourself becomes more real.

Financial institutions are already considering the avatar-aging technology as a way to boost deposits, says Jeremy Bailenson, author of Infinite Reality and head of the lab at Stanford. “You’ll upload a photograph, and the bank or brokerage will take care of the rest, showing you your future self being sad or happy depending on how much you’re saving. When you go to your bank and you’re deciding how much of your paycheck you want to spend, it will have a real effect on you.”

Until that happens, you can try to replicate the result on your own. Unfortunately, Bailenson says looking at a picture of your mother (even if she’s a dead ringer) probably won’t do the trick. You need to see you, older. You can purchase an aged picture of yourself at starting at $3.99.

Columbia Business School professor Sheena Iyengar, author of The Art of Choosing, recently conducted a study at some 401(k)-plan enrollment meetings for clients of ING. She added a question to the standard form that asked participants to imagine the benefits of saving more money. That simple exercise made a significant difference: Nearly 25 percent more of the participants who did it chose to increase their savings compared with those who didn’t.

You can get yourself to do the same by picturing the long-term results of upping your savings. Be specific, Iyengar urges. Think about what your dream retirement house looks like and what kind of car you’ll be driving. Do you see yourself maybe living or vacationing in a tropical paradise? Cut out a picture of your ideal home (with a swimming pool? a view of the ocean?) and carry it in your wallet, or download one and make it your screen saver. Then, while you’re still in the moment, call your benefits department and increase your 401(k) contribution or contact your bank and sign up for a monthly transfer of funds out of checking and into your hands-off savings account.

First Published June 28, 2011

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