Save for Tomorrow

Saving for retirement is sort of like eating your vegetables. We all know it’s good for us, but most of us don’t do as much of it as we should. There’s a reason for this. It’s called present bias. We give full value to things that happen now and discount things that happen in the future.

I could pack some carrots with my lunch (I did today) or I could pack a candy bar. The carrots don’t give me as much satisfaction today as a candy bar would, but regularly eating vegetables instead of candy will be really good for my long-term health. The problem is that I fully value the taste of the candy today and discount the health benefits that occur down the road. Retirement savings work the same way. We really value the money we could spend today, but give less value to the money we could spend 20 years from now.

How do you overcome this present bias and save more for retirement? Here are a few ideas:

1. Commit to saving an extra 1% six months from now. It’s easier to commit to future changes today than it is to actually make the changes today. Odds are you will follow through if you set it up now.
2. Find an accountability partner. This can be a friend, family member, or an investment advisor. They can help you focus on making the good long-term choice and stick with it.
3. Hang out with friends who save for retirement. This will lead to higher savings rates. If your friends love to go out to expensive dinners/concerts/sporting events, you’re likely to go along with them. You know the friends I’m talking about. Everyone loves to do those nice things sometimes, but these are the friends who are going on expensive outings multiple times per week. That live for today lifestyle won’t help you save more. Spend more time with the friends who love to find happy hour deals, look for community events, and otherwise watch their spending. They are likely to help you save money.

There are plenty of other ways to combat your present bias. Find one that works for you and get started. Let me know if you need help

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

About the Author: John O’Connor