For behavioral finance fans out there, an excellent article in Money describing the hurdles that stand in the way of savings and the nudges that can encourage savings behaviors.

First the hurdles:

• Present bias: “One problem is that we tend to prioritize our current desires over our long-term goals. This type of “present bias” often leads us to give into the temptation to blow our paycheck on exciting purchases that provide instant gratification…”

• Small hassles (I might label this laziness?): “Small hassles—like filling out a form—can prevent us from doing important things, like signing up for an investment account.”

• “Special occasions not so special” effect: “…but research shows we also tend to underestimate the frequency of “special occasions.” So when a wedding anniversary comes up, or we’re presented with an exciting but expensive opportunity, we splurge, thinking of it as a rare occurrence. But these “rare occurrences” aren’t as rare as we think.

Now the “tricks” which the author is suggesting the banks/investment firms should be doing:

• Make saving automatic: “Research has shown, for example, that automatically enrolling employees in retirement plans and setting the default contribution rate above zero—typically at 2-6% —increases people’s retirement savings.”

• Diversion portion of paycheck to emergency savings: “Banks could default their clients’ direct deposits into emergency savings. For clients who have paychecks directly deposited into their checking accounts, banks could automatically divert some income into an emergency savings account, unless clients opt out.”

• “Fresh start effect:” “Banks could take advantage of the “fresh start effect”. At the start of new cycles, like the beginning of a new week, month, or year, we feel our past failings can be swept under the rug (“That was the old me, and this is the new me”). At these moments, we’re extra motivated to tackle tough goals. Our research shows that the “fresh start effect” can spur new patterns of productive behavior and that birthdays in particular are an ideal time to encourage increased savings.”

• Divert that car or house payment into savings once you have paid off the debt: “Banks could convert debt repayment behavior into savings behavior: For example, borrowers at some Montana credit unions set up automatic withdrawals for their loan payments. Once the loan was paid off, the credit unions offered those borrowers the option to have the same payment amount automatically deposited into a savings account according to the same payment schedule.

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About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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