Saving money is an essential part of personal finance, but it can be challenging. Many people find it difficult to save money, especially when there are so many competing demands on their income.
Fortunately, research by (Choi et al. 2017) shows that small cues can significantly influence how much individuals contribute to their retirement savings plan.
This article explores how subtle cues can help you save more money and improve your overall financial well-being. We'll take a closer look at what savings cues are, how they can affect your savings choices, and how you can use them to improve your financial strategy.
What Are Savings Cues?
Savings cues are subtle signals that make a particular savings choice more salient. They are designed to influence the way people think and behave when it comes to saving money. Savings cues can take many different forms, from mentioning an arbitrary savings increase amount to a savings threshold created by an employer-matching contribution rule or contribution limit. They can also include mentioning an arbitrary savings level as an example of a goal.
For example, one study mentioned in the paper tested three types of savings cues in randomized field experiments. Anchors, which mention an arbitrary savings increase amount, threshold-based cues that leverage pre-existing rules of thumb, and goal-based cues that set concrete and difficult-to-achieve goals. These cues were designed to see how they could influence individuals' contributions to their 401(k) retirement savings plan.
How Do Savings Cues Affect Your Savings Choices?
Studies have shown that savings cues can have a significant impact on savings choices. For example, high savings cues can raise retirement contribution rates, while low savings cues can depress them.
Anchors, which are mentioned arbitrary savings increase amounts, can shift subjects' judgments and willingness to pay for goods. Threshold-based cues leverage pre-existing rules of thumb and may be more effective than anchors. Goal-based cues set concrete and difficult-to-achieve goals that can enhance performance.
In the study mentioned earlier, the researchers found that relative to the control emails, emails with cues that made a high savings choice salient increased 401(k) contribution rates by up to 2.9% of income in a pay period, while emails that made a low savings choice salient decreased 401(k) contribution rates by up to 1.4% of income in a pay period. This highlights the powerful effect that savings cues can have on individuals' savings choices.
How Can You Use Savings Cues to Improve Your Savings?
Whether you're trying to save for a down payment on a house or for retirement, using savings cues can help you achieve your goals. Here are some ways to incorporate savings cues into your financial decision-making process:
Set a savings goal and then break it down into smaller, achievable increments. For example, if you want to save $10,000 for a down payment on a house, set a goal to save $100 each week. This will help you see progress towards your goal and keep you motivated.
Take advantage of employer matching contributions by contributing enough to your retirement plan to receive the maximum match. This can provide a powerful incentive to save more for retirement.
Set specific, measurable, and achievable savings goals. For example, if you want to save $5,000 in the next year, break it down into monthly savings goals. This will help you track your progress and adjust your savings strategy as needed.
By using savings cues, you can make small changes to your financial decision-making process that can lead to big results. Whether you're just starting to save or are looking for ways to improve your savings strategy, incorporating savings cues can help you achieve your financial goals.
Improving your savings and financial decision-making can be a challenging task. However, with the right strategies and tools, you can make significant progress towards your goals. By using savings cues, you can make small changes to your financial decision-making process that can lead to big results. Whether you're just starting to save or are looking for ways to improve your savings strategy, incorporating savings cues can help you achieve your financial goals.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.