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.
Opt-Out Savings
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.
Final thoughts
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?
{ 12 comments… read them below or add one }
Great Article post Jason!
I like treating savings as a bill. We have been doing this since we got married and it works great.We also put items such as tithe in the budget and it is good discipline for us.
When I started the job I’m at now, about 2 years ago, I set up my direct deposit to split into two accounts, so I have 90% of my check going into my checking and 10% going into my savings account. Like you said, out of sight out of mind. I never even miss the money, much less think about it…. all the while my savings account has been growing! It is a great way to save money… even though its only 10% it definitely adds up quick and also gives me some piece of mind knowing that I am saving money!
I agree. I don’t know that I want the government trying to make a decision on what I should do with my money. I’d rather see the government being more aggressive about putting solutions in place to reduce the amount of fees paid for mutual funds. I know they are working to make understanding fun fees easier. After all, it is contradictory to force people into 401k saving, if, over time, there savings will be slashed by egregious fees. As for me, I like many of the alternative options. In fact, my husband and I use options 1, 2, 4, 5 and 6 to build our savings. As far as using a tax refund for savings, I know it’s widely debated that refunds are bad because you’ve loaned money to the government tax free. However, I feel that if a person doesn’t have and stick to a monthly budget, it’s better to get a lump tax refund and stick it in a savings account, than to think that having the extra money each month would find it’s way into a savings account. On the other hand, if you follow a budget, then it’s better to have the extra money each month than to get a refund. We tend to get a large refund only because it’s hard to nail down the right amount of withholdings, because my income is so variable from from year to year due to quarterly bonus and commissions.
According to the IRS website ( http://www.irs.gov/newsroom/article/0,,id=218387,00.html) the following statement is not true:
‘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.’
I just wanted to make sure the facts are right so others aren’t confused.
I’d rather make my own decisions on how and where I save my money. I already use ING Direct for automatic transfer every month. This works well for me.
Great advice it works. The IRS refunds as savings bonds was first I heard that. Pay yourself first. So many times I had tried to save money at the end of the month and does not work.
http://www.snopes.com/politics/taxes/savingsbonds.asp – you CAN receive your 2010 refund as a savings bond…but it is opt-in, not opt-out.
My husband and I treat savings as a bill. I always put at least on of my checks a month (I get two a month) into our savings account. Another trick I have is acting like I don’t have the money. When I write in the balance of my bank account into a new register I always subtract a percentage of it (say $300 if I can) and I keep my balance updated as though I don’t have that $300. For instance say I have $1200 in my bank account, I will subtract $300 from my balance so that I limit myself to working with $900. Its my way of having an emergency fund so that I don’t have to tap into my savings… This is a trick my mom taught me when I opened my first checking/savings account and it has worked for us for a long time. I also make sure I put a good portion of any leftover funds into my savings account at the end of the month. And I leave it there!
S
Monica, that’s great. You’re a good example of how this approach does work. And 10% is a good amount to save!
Ken, thanks for sharing. I also use ING for our emergency fund.
GHolmes, according to Courtney’s article it is opt-in. I’ll have to check Money Magazine because I believe that’s where I read that it is opt-out (maybe I misunderstood). Courtney, thanks for sharing that article. I also went to the source for some more information. This sounds like you do have to choose to opt-in. http://www.irs.gov/pub/irs-pdf/p4830.pdf
Shirley, that’s a really good approach to savings. And you bring up a good point in that you need to sweep the left overs at the end of the month and find a home for them in your savings account with higher interest.
ive got another easy way to save money. Pay off all credit card debt. That is a guaranteed 15% return on you money. There is no other way i’ve seen where you can get a guaranteed return on your investment that pays 15%.
I see others left info on the irs savings bond info being incorrect..here is a link to snopes saying that is not true as well..one can opt in to it
http://www.snopes.com/politics/taxes/savingsbonds.asp.
I agree on everything you said about automated savings. Last year Obama gave Americans a small percentage back into their income..but did not change the tax rules…so it really was not bonus money to people. The amount worked out to be just a about $8.00 a week. You know what, I did not save that 8.00…I did just what Obama wanted…I spent it! We are changing our withholdings this year…but we are watching for the approximate amount we are getting back now and are having that automattically put into savings. Hopefully we will not spend it again
Thanks for the article, Jason. And to Courtney for clarification of the savings bond “opt-in” instead of “opt-out.” My cynicism toward our federal government was about to be ratcheted up a notch!