5 ways you can trick yourself into becoming a better saver
For many people, the biggest hurdle to saving is creating the habit.
While many financial advisers often recommend that clients take the work out of the process by having savings automatically deducted from each paycheck, plenty of people still struggle to get started. "We're not seeing progress on the savings front," said Greg McBride, chief financial analyst for Bankrate.com, which found in a survey that 22 percent of consumers have more debt than emergency savings. "And it's desperately needed." Without savings, he adds, some consumers may pile on more debt when emergencies happen.
Some people need a bigger incentive, say the pressure of knowing someone else is counting on you or the chance to win money, to finally kick-start the habit. It being America Saves Week, a campaign organized by nonprofit, government and private groups to encourage financial literacy, we rounded up some creative ways to boost your savings.
1. Play the lottery -- with a twist
A growing number of banks and credit unions are encouraging people to save more by using a tactic called prize-linked savings accounts, which offer people who make deposits the chance to win a cash prize. The largest prize-linked savings program in the United States, Save to Win, is available through credit unions in a select number of states. Participants are typically given one chance to win the jackpot -- which can range from $25 to $5,000 -- for every $25 they save for a maximum of 10 entries per month or 30 entries total. The approach is meant to appeal to people who struggle to save but might spend a few bucks on the lottery because it offers the opportunity to win big, said David John, senior adviser for the AARP Public Policy Institute. "Except one is much more likely to end up with a positive result," he said. Unlike the traditional lottery, these players get to keep their cash even when they lose. The cash would be stored in a 12-month share certificate, which is similar to a certificate of deposit, where it would earn interest. Depending on the credit union and location, some consumers may face penalties if they withdraw cash before the 12 months are over, further encouraging them to stay focused on their saving goals.
2. Get your friends involved
If you struggle to have the self-discipline to save on your own, it might help to have some friends hold you accountable. Through so-called lending clubs, a group of people gets together to pool their savings, giving the cash post to a different person each week. For example, say 10 people contribute $100 each for a total of $1,000. Over the course of 10 weeks, the cash pot goes to a different person each week until everyone has had a turn. For those early in the cycle, it can be like receiving a short-term loan, said Jonathan Morduch, economics professor at New York University's Wagner school. For those who receive the cash toward the end of the cycle, it can feel like a forced savings program, he added.
In some cases, the pressure of knowing that other people are counting on you can be more effective than setting aside $100 a week into a savings account, said Morduch, who studied the approach as lead researcher for the U.S. Financial Diaries, a project that followed the weekly cash flow of 235 families for a year. "It's different from the way we usually think about savings, as slow and steady," he said. "This is something that works for a lot of folks."
3. Make it a competition
Savings contests, such as the 52-week savings challenge, can make saving seem more approachable by breaking a larger goal down into small weekly sums. While it's usually a system that's talked about at the start of the year, the approach can work for any year-long period. Basically, consumers start small, saving $1 the first week, $2 the second week, and so on all the way to $52 for the last week. At the end of the challenge, the account should have $1,378. Starting the challenge with friends who remind one another to make contributions each week can help some people find the motivation to keep saving, even as the amounts grow, John says.
4. Save your change
You can do this the old-fashioned way, where you throw the singles and coins left in your bag at the end of the day into a jar, McBride said. At the end of the week or month, you can take the cash and deposit it in a savings account, he said. But if you're like the many people more prone to using plastic than cash these days, you might want to check whether your bank offers a way for you to do this digitally. Bank of America, for instance, offers a Keep the Change savings program that rounds each purchase up to the nearest dollar amount and transfers the difference, be it 50 cents or 75 cents, into a savings account.
5. Have an app do it for you
New smartphone apps are making it easier for people to save by automating the process. One app, Acorns, makes it possible for people to set aside their spare change from everyday purchases. But instead of going into a low-interest savings account, the money is stored in a portfolio that invests in exchange-traded funds. Savers need to pay $1 a month in management fees for accounts smaller than $5,000 and a fee that adds up to 0.25 percent of assets for accounts $5,000 or larger. Another app, Digit, studies users' cash flow and makes automatic transfers to a savings account two or three times a week. The program, which doesn't charge fees, analyzes when a person is paid, what bills he has to pay and how he generally spends. Then it moves cash that could be extra, typically ranging from $5 to $50, into a separate account. "You don't actually feel the money missing," said Ethan Bloch, chief executive of Digit.