According to a recent article in Money magazine, saving more money depends on ways to make it easy and automatic. In other words, people just don’t save enough when it’s left up to them to decide. Given a decision of spending an extra $100 a month, or saving it, most of the time it will be spent.
But perhaps we’re not giving people enough credit. Maybe most people do want to save money, it’s just one thing leads to another and the money is gone be for they know it. Sure, that $100 might be consciously spent on clothing or entertainment in many cases, but sometimes life happens and if the money is there, it’ll be used to meet life’s needs, i.e., more groceries were needed for the current month.
The article mentions people are much more likely to save if they have to first opt-out of savings options. So if the decision is made for us, we don’t consciously have to think about savings, our savings rates will increase? Yes, that’s the idea conveyed.
Did you know starting in 2010 the IRS will issue tax refunds in the form of savings bonds unless you choose to opt-out of this option? For those who like to receive their tax refund each year as a check in the mail or electronic deposit, it won’t be so unless you make a conscious decision and tell the IRS otherwise.
You may already know some employers automatically sign employees up for 401(k) savings. Perhaps they think this is in the best interest of their employees. Probably so, but is it right to make the decision for them?
Perhaps there are some good intentions in helping America save more money, but I’m not sure I’m ready for others to start making money management decisions for me unless I direct them myself.
Do-It-Yourself Savings Options
There are certainly ways people can take action themselves and proactively save more. Sure, it requires savings conscious decisions, which is what this article is suggesting doesn’t always happen. But let’s examine a few of these before deciding one way or another:
1. Automatic transfers: There is already an easy service to take advantage of with automatic transfers of money into your savings accounts. You can set up such savings transfers through banks such as ING Direct and Ally Bank to occur based on a scheduled day each month.
2. Automatic deposits: Or, you can contact your HR department and have them deposit a portion of your paycheck directly into a savings account. As with the above option, it’s kind of like never having the money to begin with; you learn to live without it while your savings grows.
3. Treat savings as a bill: If you look at savings as another bill that must be paid each month, you’re more likely to save versus spending it. This requires including that savings as another line item in the budget and paying it at the first part of the month.
4. Get a tax refund? Some would say getting a tax refund is a good idea. Do you think it’s good or bad? Well, one argument is getting a large tax refund is a way to create a barrier to your money for the entire year. Yes, you’re loaning your money tax free to the government, but typically you’re not losing much in interest. Personally, I prefer to have the money in my hands to manage each month, but I thought I would include this as an option.
5. Flexible Spending Accounts (FSA): While it might not be savings for emergency situations that ideally include easy access to cash, Healthcare FSA’s are a great way to unconsciously save. Once you’ve made the decision on how much and signed up, the amount is automatically saved each month for your healthcare expenses.
6. Invest using a 401(k): 401(k)’s are certainly easy savings options. Granted, you still have to sign up (not the case with same employers) and choose your investments and allocation. However, it’s relatively easy process and most employers connect you with an advisor to help make investment decisions.
Rather than using opt-in savings options, there are certainly a number of ways, in my opinion, to make it easy and automatic for people to save more, if they’re willing to put forth a little effort to get them initiated.
Two of my favorite models to follow are the 401(k) and health care FSA’s. Granted, they are before tax savings options, but the model in general works. After signing up, the money is withdrawn from your paycheck as if it were never there to begin with. The same could be accomplished with setting up automatic transfers or savings deposits.
All of these approaches create some sort of artificial scarcity of money. The general idea behind them is to get the savings money out of mind and out of site quickly. I think that’s what our government and some employers are doing with the opt-out options, but the same can be created by you as the money manager.
What are your thoughts about opt-out savings? Can the savings options I mentioned work instead?
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