Make the saving promise with your future self

Deciding to save more starting this month usually means a smaller paycheck right now, and that hurts. Behavioral economists Richard Thaler and Shlomo Benartzi designed a way around that pain: hand the promise to your future self instead. They called it Save More Tomorrow.

What we know

At a US manufacturing company, employees were offered a simple plan:

• Your take-home pay stays the same today.
• The next time you get a raise, part of that raise goes automatically into your retirement savings.
• This repeats with each raise. You can stop at any time.

Of the people offered the plan, 78% joined. Among those who joined, the average saving rate rose from 3.5% to 13.6% over 40 months. Because contributions only grew when pay grew, people rarely saw their take-home pay fall.

The design steps around three common stumbling blocks:

1. We avoid pain now. Only money you have not received yet is set aside.
2. We procrastinate. Once you decide, the rest happens automatically.
3. We hate seeing our pay go down. Your take-home amount never drops.

A related US study found that when a large company switched its retirement plan to automatic enrollment, participation among new hires rose sharply, and many kept the default contribution rate (D7). People tend to stick with whatever is set up for them at the start.

Why does pushing the promise into the future help? When we picture next year, we are calmer and more willing to choose the sensible option. When the moment arrives, the decision has already been made, and doing nothing means the plan simply continues. The plan uses the same inertia that usually works against saving, and points it the other way.

How to read it

The numbers are striking, but keep a few things in mind.

• People chose to join. Those who signed up may have been more eager to save to begin with. This was not a randomized trial, so not all of the jump to 13.6% can be credited to the plan itself.
• It is one company in the US. Pay rises and retirement plans differ by country. We have not found a study that tested the same design in Japan.
• It is about the saving rate, not income. The result shows people saved a larger share. It does not show how much their income or wealth grew.

Even so, the two core ideas, putting the promise in the future and making it automatic, line up with other research. Among money habits, this is one of the better supported.

A small step today

Pair this with the app habit “Paid myself first” and try one of these:

• Write down today what share of your next income increase (a raise, a bonus, a side-job payment) you will set aside first.
• If you already save automatically, add a calendar note to review the amount at your next raise.
• Check your banking app for a setting that moves money to a separate account on payday.

The size of the amount matters less than deciding in advance. Once you have decided, log “Paid myself first” in the app.

Sources

• [D6] Thaler & Benartzi (2004) Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving. Journal of Political Economy.
• [D7] Madrian & Shea (2001) The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior. Quarterly Journal of Economics.