Tuesday, December 27, 2016

How People Can Go Years without Saving a Dime

I encounter people who have saved very little money, if any, over many years in some cases and decades in others. When we look back over long periods of time, it seems inexplicable that a seemingly intelligent person could fail to save any meaningful amount for the future. But there is a simple explanation.

When we look to past failures to save for a long time, we look like fools. But when we look to the future, we see the rest of today, along with a magical time in the future when “I’m not so busy and everything isn’t crazy.” This makes it easy to not save today. After all, what difference can a single day make? The problem is that the last decade is made up of a few thousand single days.

Of course, this magical time in the future when things are calmer will never arrive. So, it’s easy to keep putting off things like saving money, improving your diet, and exercising.

In the end, the answer to the question “how can people fail to save any money for years?” is “they do it one day at a time.”

8 comments:

  1. "But when we look to the future, we see the rest of today, along with a magical time in the future..."

    This is because our human brain is hardwired to place a high value on 'today' and a lesser value on 'tomorrow'. The decline in valuation is short and rapid until we bottom out somewhere between the 'one week' and 'one month' mark. Psychologically, pretty much every time frame outside of a week -- be it a month or a decade -- embodies the same "magical" ethereal quality (think Zeno's Paradox) and minimal valuation.

    We must trick and/or force ourselves to think and act in terms of the future. Exceptionally difficult to do with any kind of consistency. The best work around, as you've done, is to automate as many "future" variables as possible (e.g. deposits, savings, payments, rebalancing, etc.).

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    1. @SST: Heavily discounting the future is certainly one important effect. Another is procrastination and the knowledge that it can't hurt to put off saving for just one more day.

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  2. Procrastination is a whole other ball o' wax.

    This is why it's important that saving, and other future-based endeavours, are established and cultivated as behaviour as early as possible. So little of what we actually do is predicated on logic that we can't rely on thinking our way to a better future, we have to be trained to act accordingly. Either that, or as I said, replace behaviour with automation.

    Anecdotally, years ago I nudged my wife into the habit of saving only $100 per pay cheque. How did I accomplish this? I appealed to her spending nature. I drew a graph which illustrated as timed passed, that $100 would become less and less of her income; in her mind, she would get to save less and spend more. I said nothing of compound interest or any other mind-numbing financial concepts. She now has a healthy retirement fund and the perceived pain of saving -- both initially and continually -- has both dissipated and been replaced by the pleasure of spending.

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    1. @SST: I'm mulling some ideas for helping my sons. Maybe I'll try your explanation of how $100 becomes less valuable over time.

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    2. MJ -- "...$100 becomes less valuable over time."

      That's backwards. The $100 becomes MORE valuable over time. It becomes LESS of an "expenditure" from income. That's the whole point. Think supply-demand curve. (The sticking point is that total income has to grow over time...)

      As mentioned, almost all of our decisions are based on emotions, beliefs, etc., not on logic or rationale. Your task for helping your sons is to find a way to translate your logical knowledge into their emotional motivation. Have you read 'Nudge'? Might inspire some thoughts on how to approach the matter.

      Over the last year or so I've been on the hunt for basic material on money matters to give to my young nephews...the landscape is bleak.

      Good luck (said with all sincerity).

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    3. @SST: I don't follow your logic. The $100 bill in my sock drawer becomes less valuable over time. If we look at $100 I invested in the past, it tends to become more valuable over time if we add in investment returns. Perhaps you're thinking of the latter situation, and I was thinking of the former.

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  3. The future is so far away, I can start saving when I am {30|35|40|45|50|55} , is a sentence I have heard (and said) many times. I am incredibly lucky that I have a pension, but still need to work hard on the debt situation.

    I think folks who have saved show a strength of character that puts them in the top 20% of folks (if not a smaller group).

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    1. @Big Cajun Man: Sometimes it seems like savers are a small minority. I don't have any useful numbers on this.

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