Make Saving Enjoyable, or How You Can Have Your Cake and Eat It Too

Image via evan at flickr

When I talk to college graduates, they tell me they save to pay off loans, to buy a house, and to invest for retirement.

These responses are good, but perhaps they confuse the goals of saving with the reasons for saving. For example, saving for a birthday gift is a goal whereas making your friend happy is a reason.

This is a small distinction, but it’s vital to motivation. If you’re doing something only for a goal, then you often give up when you run into problems. If you work for reasons, on the other hand, you will work hard to overcome obstacles and you’ll actually enjoy it.

Think about when your parents told you to come home for curfew during high school. Did the goal of coming home by midnight make you want to do it? Of course not; if you were like people I knew, you’d come up with any excuse to stay out later. The kids that actually obeyed their parents were motivated by the reasons of safety and boundaries. They actually wanted to be home on time and made a big effort to do so. They didn’t want their parents to stay up late and worry.

The same idea holds with money. You can probably get rich by pursuing artificial goals that experts lay down for you (save 10 percent, super charge your career, etc.). But you will probably get sidetracked easily. It is better to understand the reasons and then enjoy your path. If you know why you spend money, for instance, you might not even need to budget.

When I see college graduates blowing money at clubs, malls, and vacations, I am not surprised that they miss savings goals. They use the smallest excuses to derail their own goals. It’s not like they are lazy or undisciplined. The truth is they were never really motivated in the first place.

The real reason to save is that you should want to do it. And a basic reason for that is consumption smoothing.

Consumption smoothing

You already practice consumption smoothing. It’s simply the idea of saving a portion of an abundant resource now for better use later.

It’s a natural thing, and here are some common ways you might do it:

• You save restaurant leftovers for a meal the next day
• While watching one show, you record another to view later
• When pressed for time, you bookmark interesting websites to read when you’re bored

No one needs to tell you to do these things. You simply do them automatically because you want to do them, and because deep down, you understand that saving good things for a later time would be rational.

Even children understand consumption smoothing at a relatively young age. Professor Laurence Kotlikoff, of Boston University, has a nice story about it on a video at the ESPlanner financial planning software website.

One day he presented his hungry son with 25 delicious cupcakes. As a test, he told his son he could eat all that he wanted.

At first his son gobbled down one cupcake, and then a second and a third one. But by the fourth one, he was just nibbling at it. Professor Kotlikoff then asked if his son would want even more. After all, there were more than 20 cupcakes still remaining.

But his son stopped eating. He then replied he was done, and that he wanted to save the rest of the cupcakes for the next day.

Enjoy some now, and save some for safety against an uncertain future. That’s the secret to saving for pleasure. As Professor Kotlikoff explains,

So what he wants to do is reallocate his cupcakes to tomorrow. And that’s the basis for consumption smoothing.

The idea to make your happiness, your utility (as we economists call it), as high as possible. And the way to do that is to always figure out whether to take that last cupcake and eat it now or to allocate it until tomorrow.

The same thing is true with our earnings, our income. Should we spend it today on current consumption or should we save it and allocate it to future consumption?

It’s the people who understand the real uncertainty of life–that jobs aren’t secure, that emergencies happen, that retirement will happen–that don’t have trouble saving. They save because they want to, and they crunch the numbers to stay on track. It’s the reasons, and not the goals, that motivate them.

Understand that, and you can have your cupcake today and eat it tomorrow too.

This article is included in the 156th Carnival of Personal Finance at Prime Time Money