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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Tricking yourself? Nonsense. DECIDE to be a better saver.
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 5:02AM

i cant trick myself..i already know the dollar is useless..the fed. reserve is full of ****..litreally private...and te nation cant create jobs that do pay good...

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