What is 'saving for tomorrow...tomorrow'?
Updated: Feb 23, 2022
Save More Tomorrow is a behavioral intervention pioneered by Richard Thaler and Schlomo Benartzi that is designed to make saving for retirement as easy and painless as possible. It's an actual program, but I am adapting it here for your personal use. There are three central ideas.
First, they ask you to commit now to saving more in the future. (This helps people avoid present bias--which is the tendency to prefer to settle for a smaller present reward than to wait for a larger future reward, if you have a choice.)
Second, commit to save 3% of every future pay raise--the next time you get a raise, commit now to saving 3% of it, and of every future pay raise.
(This minimizes the influence of loss aversion, since current take-home pay doesn't decrease. ) (Loss aversion means 'we hate losing stuff, even if the loss is effectively meaningless.')
Third, make the effort to automate this decision. So, once you have decided to put this concept into practice, make it automatic that you keep on doing it, if possible. Ideally, make it that you need to opt-out in order to stop. This makes good use of inertia.
By taking our mental weaknesses into account, the concept of Save More Tomorrow helps us overcome those weaknesses, allowing workers to make financial decisions closely aligned with their financial needs and long-term goals.
Can you make a commitment to saving 3% of a future pay raise? If so, write YES in the comments! And as always, thanks for reading this!
What is Money? is HERE
What is Investing? is HERE
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This post is adapted from this text by Schlomo Benartzi.