Why Saving (and Investing) for the Future is Tough and How to Overcome it
It is often easier to spend today and save tomorrow. The present self wants to consume today because tomorrow — and the future — is hard to imagine now.
But the future self wants the present self to save today. Without savings today, the future self would most probably suffer. But the future self is weak and the present self is in control.
The battle between our present and future selves is one of the main obstacles most of us face when trying to attain our financial goals. It is often not the goal itself that seems impossible, it is often the lack of self-discipline that makes achieving it seems impossible.
If the present self saves today for the future self, the present self will be upset because there is lesser to spend. Likewise, if the present self spends today and saves little or none for the future self, the future self will have to suffer.
Investing is like that too
Likewise, for investing, it is painful to take a portion — of what could have been an extravagant meal with your loved one or taking a cab to the movie theatres — to invest in an Exchange Traded Fund (ETF).
It is much easier to enjoy now and think about the future tomorrow. But there will be no future tomorrow if you don’t start building it now. It is instant gratification — or present bias in behavioural finance — that is holding us back.
We are more likely to engage in activities that reward our present self because we want to feel it now, not tomorrow, not in the future, at least for most of us.
Long-term investing is difficult for most retail investors too. It is easier to react to price movements than to read long and boring annual reports, though the latter would mean more sustainable returns over the long-term.
Daniel Goldstein on self-discipline and willpower
Daniel Goldstein mentioned at a TED talk back in November 2011 that self-discipline is “like a muscle. The more you exercise it, the stronger it gets.” And self-discipline in saving and investing is crucial to the achievement of our financial goals.
To reap the fruits of saving and investing, we have to be patient and long-term oriented. If we don’t exercise our self-discipline to save and invest on a regular basis, the results we reap might not be desirable.
Charles Duhigg wrote something very similar in The Power of Habit about willpower being a muscle that needs to be trained to be strengthened and weakens if it’s not used enough.
In saving and investing, self-discipline and willpower work hand-in-hand. You must have both — the self-discipline to make a commitment to saving and investing say, 10 to 20 percent of your monthly income, and the willpower to maintain that self-discipline or habit.
Shlomo Benartzi on inertia and loss aversion
Like Goldstein, Shlomo Benartzi shared his idea about savings and covered on issues about instant gratification, something most of us are guilty of on a daily basis. He presented two more interesting issues about saving — inertia and loss aversion.
Benartzi presented a study about organ donations and found out that people in general face inertia when the need to make tough decisions arise. He also found out that most people suffer from loss aversion. They might “mentally, emotionally and intuitively frame savings as a loss” because they have to cut their spendings to save.
So together with his partner Richard Thaler, they came up with a programme and concept to help people save more, tomorrow. They recognise people’s difficulty to save today and tendency to frame saving and investing as “losses”. So they suggested that people save more whenever their income increases, maybe about three to five percent more.
Put Goldstein and Benartzi’s ideas to work
It is not exactly possible for anyone to maintain perfectly high levels of self-discipline and willpower all the time. Benartzi’s idea about automating certain actions, such as transferring or separating funds, helps us deal with inertia or laziness.
One thing most of us can do is to have two separate bank accounts, one for savings and the other for spending. On every payday, automate a funds transfer so that you won’t have to worry that you might forget.
Next, put your self-discipline and willpower to work — don’t ever think of touching your savings account. Instead, plan your monthly budget wisely and stick to it. Whenever you get a pay raise, reward yourself but still make sure to dedicate at least a portion of it to your savings account.
Save and invest for your future self while rewarding your present self adequately and within your own means. Mahatma Gandhi sums it up very well, “The future depends on what you do today.”
*Key points in this article were taken from two TED talks back in November 2011, by Daniel Goldstein and Shlomo Benartzi.
