How to trick yourself into being a better saver

Economists and businesses are pretty good at knowing the balance between spending now and later. But human nature can get in the way of solid decisions.

By Feb 4, 2014 5:25PM

This post comes from Bob Sullivan at partner site on MSN MoneyMoney and time have a very funny relationship, and by funny, I mean, most people misunderstand it. For example: What's more valuable to you: $10 today or $20 next month? Next year? The choice to spend or save money is a constant trade-off between having something today versus having something tomorrow, but we are rarely trained to think about the time part of this equation.

Multi-colored ceramic piggy banks © Andy Roberts, OJO Images, Getty ImagesA lot of exciting things are happening in the field of behavioral economics, which marries psychology and personal finance. New-age economists -- often to the dismay of their classical brethren -- are conducting studies which show that people often make irrational decisions when it comes to money. This isn't a controversial notion: the phrase "a fool and his money are soon parted" dates to a 16th-century poem. But some of their conclusions are controversial, as they threaten a lot of presumed wisdom about the nature of free markets.

But these controversial conclusions can also save you a lot of money.

So we are starting a new series here at Perhaps you've heard phrases like "endowment effect," "anchoring" or "discounting." Perhaps you even have some notion of what these things are. But somewhere between the academic papers and the theoretical arguing, the impact on your bank account can get lost. So we are going to translate these concepts for you, and show how they can save you time and money.

Instant gratification … or bigger payoff?

So, back to time and money. Naturally, you'd rather have money today than tomorrow. Who wouldn't?  If someone offered you $100 today or $100 in a year, you'd take the money today.

Money in the future is worth less to you; you are "discounting" its value. In fact, if someone offered you $100 today or $101 in a year, you'd almost certainly take the money and run. You'd take less today than tomorrow, so real is that discounting effect. But there is an amount that would make you reconsider your choice. Maybe it's $110 versus $100? Maybe it's $150 versus $100? Most certainly, it's $500 vs. $100. That magic amount -- which is different for everyone, and in fact, can change over time – is called a discounting rate.

Economists like Joe Kable at the University of Pennsylvania actually run tests on consumers to pinpoint exactly what this rate is. Some people gladly take $18 next month over $16 today; others take $10 today instead of $50 in six months. Interesting? Perhaps only to economics geeks.

But here's what the economists don’t say as loudly about discounting rates: Big corporations are MUCH better at discounting than most consumers are. And they make big bucks exploiting this gap.

Plenty of folks take $10 today over $20 next month, for example, which is completely irrational. They could get a pricey cash advance on a credit card to replace the $10, then take the $20 in a month, pay off the card, and come out way ahead. Heck, they could take that deal, then borrow $10 from a friend, promise to pay back $15, and still win.

But while consumers misunderstand such opportunities, corporations with good finance departments rarely do. Now, make a few million transactions like that a year, and you're talking about real money.

Think like an economist

Let's tweak the circumstances of the time-money choice and create a big change in decision-making. Say I offer you $100 in 10 years or $150 in 11 years. Most people chose the $150, and I bet you did, too, even though this decision is quite similar to the earlier quandary (waiting 12 months gets you an extra $50). That's because both rewards come in the future, and you don't mind waiting the extra time, since you have to wait anyway. You discount both alternatives. Now, if I give you a second chance to make the choice 10 years from now, you'll probably take the $100 and run, again. Economists call this concept hyperbolic discounting.

How can you use the concept of discounting in everyday life? Discounting has direct and obvious implications for saving money. Would you rather have $50 this week or $50,000 at retirement? Make the right choice on that question every week, and you'll have your $50K (if you are under 30).

The best mental exercise to help your decision-making is to imagine your "future self" as a real person, and have a conversation. After all, if you are under 30, you are going to have to explain to that 60-year-old where that $50 went. Some studies have shown that creating an artificially-aged image of consumers and showing it to them actually improves their ability to trade things today for things tomorrow.

This “ask your future self” exercise works beyond personal finance, too: Other studies have shown that people who are good at imagining their future eat more healthy (they trade a cookie today for a slimmer waist tomorrow), and they are less likely to abuse alcohol or drugs (trading a high today for health tomorrow).

Another way to think of this time/money problem is to use a word your mother always used: impatience. That's what Theresa Kuchler did in a paper she published at the Stanford Institute for Economic Policy Research last year called "Sticking to Your Plan: Hyperbolic Discounting and Credit Card Paydown." It measured consumers' ability to set and stick to plans to pay off credit card debt. A group she termed as "naive" often spent money today, thinking they would make a better choice next month -- when they would once again fail to listen to pleas from their future selves. That’s hyperbolic discounting in action. It’s easy to promise to start saving next month. That seems less appetizing when next month arrives, so – sticking with the above example – people take the $100 and run.

The main lesson for you: When you find yourself trading something tomorrow for something today, take 10 seconds to think like an economist and ask yourself, “Am I underestimating the value this money might have to me in the future?” It’s a healthy habit you’ll use every day.

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Feb 9, 2014 12:11PM
We hang the petty thieves and appoint the great ones to public office
Feb 9, 2014 12:09PM
If nothing else has pissed you off about this administration this might get to you. The US has entered into a contract with a real estate firm to sell 56 buildings that currently house U.S. Post Offices. The government has decided it no longer needs these buildings, most of which are located on prime land in towns and cities across the country. The sale of these properties will fetch about $19 billion. A regular real estate commission will be paid to the company that was given the exclusive listing for handling the sales. That company is CRI and it belongs to a man named Richard Blum. Richard Blum is the husband of Senator Dianne Feinstein.   Senator Feinstein and her husband stand to make a fortune (est. at between $950 million and $1.1 billion!!) from these transactions. His company is the sole govt real estate agent on the sale. CRI will be making a minimum of 3% and as much as 6% commission on each and every sale.

All of the properties that are being sold are all fully paid for. They were purchased with U.S. taxpayers’ dollars. The U.S.P.S. is allowed free and c lea r, tax exempt use. The only cost to keep them open is the cost to actually keep the doors open and the heat and lights on. The United States Postal Service doesn't even have to pay county property taxes on these subject properties. Would you put your house in foreclosure just because you couldn't afford to pay the electric bill? Well, the folks in Washington have given the Post Office the OK to do it! Worse yet, most of the net proceeds of the sales will go back to the U.S.P.S, an organization that is so poorly managed that they have lost $117 billion dollars in the past 10 years! No one in the mainstream media is even raising an eyebrow over the conflict of interest and on the possibility of corruption on the sale of billions of dollars’ worth of public assets. How does a U.S. Senator from San Francisco manage to get away with organizing and lobbying such a sweet deal? Has our government become so elitist that they have no fear of oversight?
Feb 9, 2014 12:10PM
"How fortunate for governments that the people they administer don't think."
                                                                                                   ~~Adolf Hitler
Feb 9, 2014 12:11PM
 When I was a boy I was told that anybody could become President; I'm beginning to believe it.
        ~Clarence Darrow~
Tricking yourself? Nonsense. DECIDE to be a better saver.
Feb 9, 2014 12:11PM
If we got one-tenth of what was promised to us in these State of the Union speeches, there wouldn't be any inducement to go to heaven.
        ~Will Rogers~
Feb 9, 2014 12:09PM
We were attacked (in the Gulf of Tonkin)
I am not a crook
GHW Bush:
Read my lips - No new taxes
I did not have sex with that woman... Miss Lewinski
GW Bush:
Iraq has weapons of mass destruction
I will have the most transparent administration in history.
The stimulus will fund shovel-ready jobs.
I am focused like a laser on creating jobs.
The IRS is not targeting anyone.
It was a spontaneous riot about a movie.
If I had a son.....
I will put an end to the type of politics that "breeds division, conflict and cynicism".
You didn't build that!
I will restore trust in Government.
The Cambridge cops acted stupidly.
The public will have 5 days to look at every bill that lands on my desk
It's not my red line - it is the world's red line.
Whistle blowers will be protected in my administration.
We got back every dime we used to rescue the banks and auto companies, with interest. 
I am not spying on American citizens.
ObamaCare will be good for America 
You can keep your family doctor.
Premiums will be lowered by $2500.
If you like it, you can keep your current healthcare plan
It's just like shopping at Amazon
I knew nothing about "Fast and Furious" gun-running to Mexican drug cartels
I knew nothing about IRS targeting conservative groups
I knew nothing about what happened in Benghazi
I have never seen my Uncle from Kenya who is in the country illegally and that was arrested and told to leave the country over 20 years ago
And, I have never lived with that uncle. (He finally admitted today, [12-05-2013] that he DID know his uncle and that he DID live with him.)
And the biggest one of all:
"I, Barrack Hussein Obama, pledge to preserve, protect and defend the Constitution of the United States of America."
Feb 9, 2014 12:12PM
Politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other.
        ~Oscar Ameringer~
Feb 9, 2014 12:08PM

 "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the US Government cannot pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government's reckless fiscal policies. Increasing America's debt weakens us domestically and internationally. Leadership means that, 'the buck stops here.' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."
   ~ Senator Barack H. Obama, March 2006


Feb 9, 2014 1:20PM

If you have to trick yourself into doing something you're a fool.

Man up!

Don't expect others to bail you out.

Be responsible.

If you don't have a skill, start at the bottom and work your way up, learn as you go.

Feb 9, 2014 12:53PM
I don't really consider it tricking myself, but I would get a loan from the credit union and have it auto deducted from my check, an when the loan was paid off I wouldn't change the deduction and that money went into my savings account. Since it was money I learned to live without, it wasn't something I missed out of my check, it built a nice nest egg.
Feb 9, 2014 9:21AM
There are ways to save money without being to conscious of it. If you have a checking account, set up an Overdraft Protection Account. the bank will take an amount that you want from your checking account every month and put it in it, say $25. If you write an overdraft it is covered and the service is free. If you don't write any overdrafts the money starts building up and your saving without realizing it. I have been doing this practice for many years and have saved a tidy sum. I'm now retired and I have my check sent to the bank and they still are taking out to savings. My only regret is I didn't start it 20 years sooner. 
Feb 9, 2014 1:26PM
if you're not smart enough to save, you're just as easily manipulated by commercialism to spend. "don't worry there's always welfare" bumper sticker.
Feb 9, 2014 12:16PM
Yea "trick yourself" is what they are already doing and if you think this advice will work for them you need a few sessions on the couch. Ha
Feb 9, 2014 4:06PM
If you have to *trick* yourself into saving, you're a retard.
Feb 9, 2014 8:26AM
I am not that good at tricking myself,but I do trip on the rug at times.Can't be perfect  Great Day 
Feb 10, 2014 4:00AM
Hey money is hard to come by these days but you can make some extra cash to save by doing small online tasks just click this link
Feb 9, 2014 9:51PM
OMG >>>>>>>>>>>>.. really? the now advice to save is to trick yourself into saving? Are people really so spineless that in the first place they need to BE TOLD to save so when they are old they can buy bread, well if thats the case? then really in my opionion, those people should be intitutionalized!
Feb 9, 2014 1:58PM
easiest way to save???. when u pay bills, for instance gas bill 27.50, deduct 30 from checking account. end of year, enough for Christmas presents
Feb 9, 2014 11:29AM

The American people are on their knees. The greed of the corporations that have the prices in the grocery store, the gas station, the rent, the insurance , the basic needs, have MOST Americans living pay day to pay day, And now Obama care, And the billions of dollars cut in Aid to Americans who depend on food stamps will drive this country into civil war sooner than later.

The only good thing I see is Obama putting his name on the affordable health care act that will lead to his and all liberals down fall.

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