Life Kit - It's A Good Time To Save More. Here's How

Episode Date: August 19, 2020

If you're not good at saving money, it's not your fault: Humans are hard-wired to focus on the present. But there's a way to beat evolution and build for your future. This episode explains how to make saving automatic and painless.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is NPR's Life Kit, and this is day three of your personal finance tune-up. So far, we've taken a hard look at your budget and made a plan to crush your debt, or at least dodge some of it. So look, if you're doing this, you are doing great, really. You are taking steps. You should be proud of yourself. It's so hard to just sit down and deal with this, and you are. You're doing it. You're doing great. Really, you should be proud of yourself. And this episode is going to set you up for your financial future. But before we get there, we're going on a journey and we're going to start in caveman times. All right.

You are a caveman. Just go with me here. Or a cavewoman. Either way, you're pretty hairy. you know, attractive in your own way. But we are roaming around the savanna. You're fighting for your life every day. You're foraging for food. I mean, danger is everywhere. It's kind of exciting, but it's also kind of scary because there's wolves and saber-toothed tigers and they're creeping up behind you all the time. It's like, whoa. Now, is this the best time to be thinking about saving and your 401k retirement account and stuff like that? I mean, no, of course not. Cavemen don't think about that stuff. You need to survive the day and eat food and don't get eaten yourself. And, okay, we're being stupid and corny here. But this is, in fact, a good lesson about saving money, because the point is that we are hardwired to focus on the presence and immediate gratification.

And it's been that way for a very long time. And this is like the opposite of what your brain has to do to focus on saving money. Behavioral economists call it discounting the future. We basically say it's hard for us to wait. We don't want to wait. We want to get it right now at this moment. And we discount the importance of what we'll need in the future. So actually, to save money for the future, you have millions of years of evolution to fight against. But there's a way to win the fights. Oh, sorry. That was me.

No. This is your NPR Life Kit for saving and investing. And in this episode, we're going to be talking about how to start saving money. And it's going to be worth it because, you know, going on vacations once we can again and getting on planes is safe. We should note, by the way,

that we recorded this podcast before the pandemic broke out, but all of this stuff is still true. We're talking about long-term savings. And look, I want to retire with a nice cabin and a fishing boat and be super happy down the road, a place the kids might actually want to come visit me. And to do that, you have to actually start saving money and sticking it away somewhere. And we're going to learn how right after this. I'm Chris Arnold, and I've reported on personal finance for years. And there's just so much about money that we need to know and that we don't learn in school. And in this episode, we're going to give

you some really good practical tips, things that have been researched and proven to work to help you save more money. And OK, call this big takeaway number one. If you want to save money, you have to make it automatic. I'm making a dramatic pause here. Automatic. Get that in your head. Remember it. It's really important.

This gets back to the caveman thing. Our brains are just not going to focus on a lot of the, oh, you know, it's Tuesday. I guess this is the day I need to transfer some money to my savings account. Let's do that right now. I mean, no, that's just not going to happen. The most important thing you can do right now is automate your savings. I mean, right now, you should be putting on autopilot your 401k at your job or your 403b at your job or your bank savings account. That's Beth Kobliner.

She's a financial expert. She wrote a book called Get a Financial Life. And she spent her career helping people make sense of their money. It's true, and I know how it can seem so overwhelming. You're not alone. And for some people, look, if you're living paycheck to paycheck or supporting a relative or you're a single parent, saving can seem really impossible. And I mean, I started out freelancing in public radio. I drove a $600 car. I know that sometimes you can't save any money, but when you get to the point where you can just save anything, something, that is better than saving nothing. And there are good strategies to make it a lot more doable. And if money is really tight, here's one thing you could do. You could just start with like 2% of your paycheck and start auto-depositing that into a retirement or a savings account. People always feel like, oh, I can't save. It's too hard.

Because our lifestyles adjust to our paycheck. But as best as you can, put that 2%, 3% to start and then start increasing it every year. And then Beth says the goal should be to save between 10% and 15% of your salary. Whether you can do that right away or sort of inch it up over time. year. And then Beth says the goal should be to save between 10 and 15 percent of your salary, whether you can do that right away or sort of inch it up over time. You know, if you get a raise or inflation goes up and usually your paycheck comes up a bit, you know, every year or so you bump it up another two percent, another three percent. And four or five years out, you're saving a significant amount of money. And then you want to get that auto deposited into a savings account. So it's not just sitting in your checking account.

You don't want to be able to touch the money. You don't want it to be there because once you touch that money, you spend it. Automatically putting at least 10% to 15% of your salary into these accounts makes sense. To me, this is the biggest takeaway. This is the most important thing, that there's a behavioral economist named Bridget Madrian at Harvard, and she did this research that found that if you automatically enroll someone in a retirement plan, like the company does it, 90% of people, and these are the same people who will say, oh, I've got student loans, I can't save them. Right, I can't afford it. Oh, my God, this is impossible for me. 90% of people will stick with it, and they'll save and they'll do it. Absolutely, yeah. This is impossible for me. 90% of people will stick with it and they'll save and they'll do it. Absolutely.

Yeah. Okay. Our next takeaway, call it tip number two. You want to split this money that you're saving up into several different accounts. All right. Here's how this is going to work. If we have that 15% that we're ideally saving, Beth says maybe 8% or 10% of that goes into just your retirement investment account, especially if your employer matches what you put in.

Then you just have to put in enough to get the full match. I mean, that's free money. You put in a dollar, you get a dollar. Who would say no to free money? If you walk into, you know, you see a few hundred dollars on the street, you pick it up. You know, this is free money that people are passing up. So it is so important, no matter what your age is, you must put the most your company will match up until, some companies say 7%, 10%, put that into your retirement savings account. You're making a smart financial decision,

and you're really also providing for yourself down the road. We've actually got another whole episode specifically on how to set up a retirement account and invest it in a really smart way. So check that out. And then Beth says the rest of the money that you're saving, she says you can set up on auto deposits every paycheck into an emergency fund or some people call it a buffer account. And then take some and put it in just a savings account for fun stuff that you want to do or the things that you really want to spend money on. Tip number three, how do you prioritize saving versus paying off debts? And a lot of people get confused by this and they just don't know what to do in it and it gets in the way, which is understandable because, you know, you might think I have these student loans and I have these credit cards and I need to pay them off. How can I be saving?

Beth says a good way to think about this is to compare the amount that you could be earning by saving and investing versus what is the debt costing you and then prioritize it that way. I say it's just go by the numbers. So putting money into a retirement account is earning, if you have matching, like 100% on your money. Then what's the next interest rate? Paying off a credit card that's charging you 17% is the equivalent of earning 17% on your money. That's the next best. And that's where you should put your money, paying off that high rate debt and then paying off the lower rate debts like the student rate debt. And then finally, you want to have a little bit of money set aside for a plain old bank account, a bank savings account that maybe only pays 2%, which isn't great, but it's emergency money, money you know will be there. So when I said you save in total 15% of your paycheck, you divide it up among those priorities and you look at the numbers and you put it in order of what makes sense mathematically.

That's one way to do it. We've been doing some heavy lifting here with percentages and accounts and all this stuff. I've got some good news. The next big tip is, and call this tip number four, sometimes it makes sense to just blow some money on yourself, especially if that gets you to actually do these things that we're talking about. So that says, think of something that you like to do or something you want to buy that costs, say, two or three hundred dollars. And then this week, get all this done, get the account set up, the auto deposit, all this different stuff, and then do it. Go ahead. Give yourself the reward. Giving yourself a small award can be really motivating.

This is actually known as mental accounting. We give our money a particular purpose, and that helps us keep from spending it randomly. And so that's absolutely a great idea. And it's interesting. Studies have found that people who are good at delaying gratification, they're not necessarily self-deniers and they don't give themselves anything. They're actually just better at distracting themselves. Now, I want you to close your eyes and imagine your future self 20 or 30 years from now, whatever it is, you've totally crushed it. You've saved a lot. You've invested smart. You don't like on a vineyard. Let's be a little realistic. But where are you?

Are you like in the desert? You got this Adobe house. You're painting like Georgia O'Keeffe. For me, I'm on someplace like Cape Cod. Maybe not quite that expensive. It is public radio, but I've got an awesome cabiny kind of house for me and my wife and my kids and friends come and stay because, you know, it's beautiful. I got a fishing boat. Okay, so the simple act of doing this can actually make you better at saving money. Research shows that envisioning your future self can actually make you more likely to save. Stanford did this very cool study, and they had two groups of students, and they gave each of them avatars. They made computer avatars for them, but one group of avatars were the same age as the

students, and the other group of avatars were avatars in their 70s. And then after the students interacted with their avatars, they asked them, what would you do with $1,000? And those who saw themselves at age 70, who sort of got to know their 70-year-old selves, they saved twice as much in their retirement accounts. They said they would put twice as much into their retirement accounts than those who didn't meet their future selves. helps. This next thing we're going to talk about, tip number six, is a massive takeaway if you are young. And here it is. The money that you save early in life, if you invest it, can grow to just be massively huge. So you really want to start saving young. Like if you manage to sock away, say, $30,000 by the time you're 30 or in your early 30s, that could realistically turn into half a million dollars when you're retired.

The magic of tax-free compound growth. Tax-free compound growth. I mean, that might sound sort of boring, but to me, that's actually kind of exciting because this isn't just about having a nice retirement account. It sounds like boring dollars and cents, but it's really about lifestyle choices. Absolutely. Options. It's about your mind over money.

You know, where do you want to be? And thinking about that rather than the here and now and the nuts and bolts that can kind of bring us all down. Think about what you want in the future. You can do all of this stuff, right? And even if you just start saving a small amount of money and then that starts to add up, I mean, it's going to feel really good. And just so we can remember all this stuff

we've been talking about, here are the takeaways, starting with number one. Well, first you need to automate your savings. You want to reach that goal of saving 10 to 15 percent of your salary. Tip number two is that you want to divide up what you're automatically saving into a few different accounts. So none of this is in your checking account where you're just going to spend it on lattes. And you definitely want to take advantage of an employer match. OK, number three.

You want to prioritize what savings comes before paying off debt. Number four. Reward yourself. You don't have to deny yourself. Tip number five. I like this is envisioning your future self. It's fun and it'll help you save more. And tip number six.

This one's important if you're young. Saving money early can add up to a huge pile of money later, thanks to compound interest. And finally, if you figure out a way to manage this, it will make your life happier. For more NPR Life Kit, check out our other episodes. There's one about coming up with your TV streaming strategy and another on how to give advice, something we're pretty good at here. You can find those at npr.org slash LifeKit. And if you love LifeKit and you want more,

subscribe to our newsletter at npr.org slash LifeKit newsletter. And there's also the Your Money and Your Life Facebook group that we've set up. We've got like 50,000 people in there sharing ideas and suggestions. And there's a lot of really smart, like retired professors giving you advice. It's very, very cool. And now they talk about all kinds of personal finance topics. And now a completely random tip.

This time it's from Griffin Rowell from NPR's marketing and branding team. So if I'm taking an Uber or Lyft and I want to get to a general area, I don't have a specific address or drop off that I need to arrive at. Oftentimes I'll pick a few different locations and try them out and see if I can get a cheaper fare. Sometimes the algorithm kind of glitches and will knock a few dollars off, despite the location not being too far off from the desired destination. If you've got a good tip, leave us a voicemail at 202-216-9823 or email us a voice memo.

That's where you use the phone to record your voice and send it to us at lifekit at npr.org. This episode was produced by the fabulous Megan Cain, who's also our managing producer. Beth Donovan is the senior editor. This episode was edited by the fabulous Megan Cain, who's also our managing producer. Beth Donovan is the senior editor. This episode was edited by Neil Carruth. Our digital editor is Beck Harlan, and our editorial assistant is Claire Schneider. I'm Chris Arnold.

Thanks for listening.