• Daniel Snitkovskiy

How to Reach Your Savings Goals

Saving money is a core part of everyone's personal finance journey: it's how we finance the things important to us and grow our wealth. If personal finance is your body, then savings would be the heart, pumping blood to all of your vital financial organs, from retirement to emergency funds. This article will dig into the challenges of saving, techniques for figuring out what to save for, and strategies to help you reach your savings goals.


A few reasons why saving money is hard 😫

The savings rate in the U.S. (what % of your disposable income you have leftover) in 2019 was around 7.6%. That means that people spent around 92.4% of their take-home after-tax money in 2019. If you earned the median wage in 2019 of $40,000 per year, that'd amount to around $3,000, which is nowhere near enough if you wanted to achieve your dream of living like a hobbit. In all seriousness though, people aren't saving enough: one in five Americans in retirement report financial discomfort, and millions of Americans are $400 away from serious financial hardships. These are symptoms of a real problem that many have when putting away money for future needs, and many of the reasons are legitimately hard to overcome. Before we dive into savings strategies, the next few sections* will deconstruct some of the reasons why achieving our savings goals is hard so that hopefully you'll feel better about not being a perfect saver (none of us at YNB are, so you're not alone 😊).


* Skip to the savings goals and strategies section if you want to jump ahead!


Losses Hurt More Than Gains Feel Good

When we think about saving money, we often think of it in terms of fore-going immediate spending. If you get $3000 of hard-earned money at the end of the month and are told that you can't spend half of that money, then you're left with $1500 that you can readily spend on fun things. This decision, while usually voluntarily, can be seen as a loss of spending power in our brains, and popular Behavioral Finance theory, Prospect Theory, can help us see how losses affect our decision-making. Here's Prospect Theory in 1 graph:

The x-axis is how much money we're gaining (positive) or losing (negative). The y-axis is how much subjective value (a rough proxy for utility/happiness) we view that dollar amount to give (positive) or take-away (negative) from us. The big takeaway is comparing a $0.05 gain (top-right blue point) with an equal loss (bottom-left blue point): gaining that $0.05 made us "feel good" about 17 units, but taking away that same $0.05 made us "feel bad" a little over 40 units*. This general phenomenon is called loss aversion and underlies many common cognitive biases that can cause you to overvalue the things that you own or over-eating at a buffet.


* Note: These are population averages. Check out this neat loss aversion calculator to give you an estimate for how you personally weight losses vs. gains.


Behavioral Finance researcher Dr. Shlomo Benartzi cites loss aversion as one of the key behavioral challenges that limit individuals from saving for a secure financial future.

Since saving money can be viewed as a loss of spending power, then the $1500 that you save would psychologically hurt more than the $1500 you can spend feels good, which means you're more likely to save less to save yourself from pain. 😵

Old Brain, New Problems

As of June 2017, we know that the human species (homo-sapiens) have been around for over 300,000 years, whereas modern civilization has been around for about the last 6,000 years. So for most of humanity, life was about maintaining that #paleo-diet while trying not to get eaten by giant hyenas. Therefore, the set of problems we had to solve for most of our existence were less about how to save more in our 401(k), and more about survival. As a result, our brain has certain properties that were more useful back-then than they are now:

This is an illustration of an area in our brain called the limbic system and is directly involved in the survival of the individual/species, and is considered one of the most evolutionarily ancient parts of our brain! Compared to the limbic system, the cerebral cortex (i.e. the part of our brain that deals with thought, attention, and personal finance) was much more recent.


It's this divide between the old and the new brain that professor of Psychology Dr. Elke Weber, uses to explain why it's so hard for us to save. The central problem is risk-perception (i.e. how scared are we about a potential outcome). Saving for retirement isn't seen as an "impending disaster", so we don't have the same 🔥 lit under us (i.e. motivation) to do something to mitigate the risks of poor retirement planning.

When it comes to saving, the risks are often far into the future and abstract, which is less emotionally visceral than the tiger that's chasing you. 🐯

How to set better savings goals 🎯

The above factors are just a taste of what makes something seemingly simple like saving harder than you might think. However, don't lose hope! The difficulty of the problem just speaks to the importance of having tools in our tool-box to work smarter. This and the next section will go into some of the key tools that'll help us overcome these obstacles and accomplish our savings goals. ⚡️But how do you even come up with savings goals? That's what this section is all about; let's dive in!


Setting Goals In General

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Setting goals is really about being clear about what you want out of life and outlining the blueprints for how to achieve these wants. One way to figure this out for yourself is by (a) determining your big-picture goals and (b) deriving concrete sub-goals from those big-picture goals.


Big-picture goals are broad desires that we aspire towards For example, you could have a big-picture goal to learn foreign languages. Coming up with these big-picture goals can be an enlightening process, and there are various brainstorming techniques to help you do this systematically. Once you have a big-picture goal, you can break it down into smaller, SMART sub-goals. SMART stands for Specific, Measurable, Attainable, Relevant, and Time-Bound, which are all general characteristics to keep in mind when coming up with sub-goals. Going back to our foreign language big-picture goal, we can set a SMART sub-goal to gain conversational proficiency in Spanish within the next 2 years. This makes the once daunting task of learning foreign languages something tangible that we can envision accomplishing.


For savings goals, Time-Bound (when you need the money) and Specific (how much money you'll need) are especially important questions to be clear about, not only for your own motivation but also for actually executing it (as we'll see in later sections).


Prioritizing Goals

With finite money/time, many of us will have to prioritize some savings goals over others. Though there are a multitude of techniques to walk you through prioritization, from cost-benefit analysis to the Eisenhower matrix, let's look at 2 core factors to keep in mind:

  • Opportunity Cost: If you don't spend your money on Goal A, what else could you use the money for? This can be direct (e.g. I could buy a cactus with the money instead) or indirect (e.g. I could invest the money and make $500 in 3 years).

  • Spark Joy: If Goal A and Goal B cost the same, which one would make you happier? Whether it's the quality of life improvement you get from having a car in a busy city or the comfort of a nice latte, Marie Kondo's mantra can help us determine how much something is actually worth.*

* Note: This is the same idea as "subjective value" that was mentioned in the section on Prospect Theory.


Common Savings Goals

According to a Nerdwallet survey: emergency funds are the most common savings goal, followed by vacation funds, mortgages, and retirement. Unsurprisingly, these are some of the most high-cost categories of spending that one will typically have to consider, which makes it all the more necessary to have a clear savings plan. Insider.com notes other common high-cost aspects of life, from weddings to gift-giving in general.


How to optimize your progress towards your savings goals 🛠

Now that we've got an appropriate savings goal in hand, how can we efficiently execute our goal? How can we overcome some of the barriers mentioned in the first section? All that and more will be answered in this section to help put you on the path toward successfully completing your savings goals! 🎉


Pre-Requisite: Having a Budget

We hate that this is the first thing we always say, but having a budget is key. A good understanding of how much money is coming in vs. going out, which costs are necessity vs. discretionary, and more will serve as your "reality check" when actually executing your savings goals. Check out our article on budgeting as well as our MoneyStory on values-based budgeting for help on that front.


Activate the Limbic System

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The more we can make accomplishing our savings goal emotionally visceral, the more we can motivate ourselves to follow-through. Here are some strategies to try out:

  • Envision Failure: Just as absence makes the heart grow fonder, thinking directly about the stakes can help emotionally charge up the risks, and fear is a great motivator. You can even try running a simulation (e.g. living on 1/2 of your income for a month can give you the experience you need to increase your retirement savings 😉).

  • Sub-Savings Accounts: In a previous edition, we saw how our minds naturally group money by purpose, and we can actually use this tendency to our advantage! By putting a label on a savings account (e.g. "trip to Bali"), then we'll naturally treat the money flowing into that account differently, and can attach some emotions to that money based on the goal.

  • Commitment Devices: Sometimes, having structures can act as forcing functions for us to behave a certain way. Similar to Envisioning Failure, we can attach consequences to help us stick to our goals. For example, you can utilize an account that has penalties for early withdrawals (e.g. retirement accounts, Certificates of Deposit (CDs), etc.)


Think Small and Perceive Less Loss

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The more we can lessen the impact of loss aversion, the more likely we'll be able to save (and the more we'll end up saving). The less money we think we're losing, the more money we'll be able to save. Here are a few ways to do that:

  • Increase Savings Gradually: Just like having a SMART goal can make a big-picture goal seem less daunting, so can having a small initial goal make a large savings target easier to hit. You can start small, and bump your savings rate by milestones based on (a) time (e.g. every 6 months) or (b) achievement (e.g. when you get a raise)*.

  • Use Smaller Savings Intervals: A 2019 study in conjunction with Acorns found that four times as many consumers enrolled in auto-deposit savings accounts when contributions were framed in daily amounts as opposed to monthly amounts. This tries to lessen the pain of losing $150 per month to $5 per day (same amount, different framing!)

* Note: This strategy is part of Dr. Benartzi's Save for tomorrow, tomorrow program to help increase 401(k) contributions, and actually served as a basis for the 2006 Pension Protection Act!


Automation

One way to side-step our psychological limitations is to put savings on auto-pilot. Automation removes the need to constantly make decisions (affected by loss aversion and our limbic system), making the right option the default option. Setting the default can be an incredibly powerful tool. For example, a 2001 study investigating 401(k) participation found that when 401(k) was default "opt-in" (i.e. had to explicitly say you didn't want to contribute), the participation rate was almost 50% higher than when the default was "opt-out" (i.e. had to explicitly say you did want to contribute).

One way to automate your savings is to create a Personal Finance System. Ramit Sethi, the author of I Will Teach You to be Rich, has a great guide on how to do just that. The basic idea is to (a) have all of your accounts in place (including sub-savings accounts), (b) figure out what % of your paycheck hits your checking account (i.e. taking out 401(k) contributions), and (c) piping the money that hits your checking account into the correct accounts automatically (e.g. auto-deposit, scheduled wire transfers, etc.).


Having automation in place will also allow you to visualize your progress towards your goals. Whether it's checking in every month to see how far you've come, having milestones can add feelings of accomplishment as you're progressing towards your savings goal. 💪


An Assortment of Useful Tips

Savings hacks are more numerous than the stars in the sky 🌌, so here are a handful of other useful tips to try as you're figuring out which techniques work best for you:

  • Find Windfalls: one useful way to sneak more money into your savings is to put unexpected money into your savings account by default. This can apply to small (e.g. rounding up purchases to the nearest dollar) or big amounts (e.g. putting an annual bonus towards a savings goal).

  • Invest For Long-Term Goals: If your goal has a relatively long time-horizon (5-10+ years), then you can consider putting your savings into an investment account. Be careful though: you'll want to adjust the risk of your portfolio depending on the time-horizon and how necessary saving up the full amount is (e.g. don't invest your rent payments). If you have a short time-horizon or don't want to take the risks, consider a High-Yield Savings account instead.

  • Find Ways to Spend Less: This could be its own article (stay tuned!) but is one of the most common ways of finding more money to save. Some of the most common tips will focus on how to resist impulse spending (e.g. having a waiting rule for purchases) or finding deals (e.g. buying airline tickets in advance).


Action Items

With an article like this that has a large collection of tips/tricks, the best thing you can do is to pick a small number of these strategies and experiment with them in your own life. Trying a handful of any of the tips that seem interesting to you is great, but here are some meta-tips if you aren't sure what to try:

  1. If you aren't sure what to save for, try to come up with 1-2 SMART savings goals that you can use to guide your personal financial decisions. Practicing being clear on what you want can help you better personalize your finances.

  2. If you have a couple of savings goals in mind but haven't started saving yet, try 1-2 high-effort strategies (e.g. Personal Finance System). Starting from a blank slate can often make it easier to try the more ambitious strategies.

  3. If you're already saving for a few goals, try adding on 1-2 low-effort strategies (e.g. Use Smaller Savings Intervals). When you've already got a system in motion, it's often easier to make small tweaks along the way rather than starting from scratch.


Conclusion

We started this article off by talking about the reasons reaching our savings goals is hard so that we can be more understanding of why it's okay not to be perfect, and see how the various saving strategies can help us reach our savings goals despite these imperfections. Since saving is so tied to our goals in life, it's really about making sure that your actions are in-line with those goals. Ramit Sethi calls this Living a Rich Life, and it means being conscious about spending on what makes you happy (e.g. lattes if that's your tune), not on the things that don't (e.g. FOMO purchases). Sometimes sacrifices do have to be made, but let those sacrifices be informed by your goals rather than trying to have a certain balance on your account 💯.

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Disclaimer: The content on Young, Not Broke is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor.

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