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What Motivates People to Save?


What Motivates People to Save?

How do you encourage people to save? That’s a question sure to spark a debate. Researchers from the Stanford Graduate School of Business and Tilburg University in the Netherlands have an answer -- make them feel more powerful.

"When it comes to managing finances, it’s easy for people to feel overwhelmed and out of control," Stanford PhD student Emily Garbinsky and co-author, said in a prepared statement.

In a series of five experiments the researchers showed that feeling powerful, defined as having control over valuable resources is a pleasant state that individuals are motivated to maintain. In their paper, "Money in the Bank: Feeling Powerful Increases Saving," researchers explain that since money is the most coveted resource people have, they argue that individuals who feel powerful save money to secure their feelings of power. They found that if power were guaranteed to be secure for life, or if power could be leveraged through another source, such as knowledge, it not help fill the coffers. The impulse to save was observed only when saving money was considered a means toward maintaining power.

Is power the magic pill to get people to save?

For sure, money and power are intricately linked. "People feel powerless and helpless when they don’t have a savings or retirement account, live paycheck to paycheck or experience a financial crisis. You feel more confident, in control and powerful when you have a savings and/or retirement account – when you don’t have to worry about how you will pay for car repairs or a broken furnace,’ says Harrine Freeman, author of How to Get Out of Debt: Get an "A" Credit Rating for Free.

She says people who don’t save feel a temporary sense of power when they buy something they believe shows they are powerful such as, "a BMW, going on vacation to a Caribbean island or buying a designer item like Louis Vuitton."

If they can’t really afford such luxuries, they wind up in trouble, powerless, instead of powerful.

David Walters, a certified financial planner with Palisades Hudson Financial Group, gets the connection between power and control, which he thinks is an important factor when it comes to savings, but in his experience, the best way to get someone to increase their savings is to first show them the facts.

For example, "Show them how much they’ll need in retirement based on their income sources and current savings. Often there is a big gap between the two, and that’s when you can get down to the details of organizing your affairs and planning for what can be done to close the gap," he says.

Having a plan is key. "It’s about having an organized plan to get from point A to point B (a comfortable retirement)," he says. When you have a plan, you feel in control. "Taking control of your affairs gives you a sense of power over you own destiny."

There’s also something to be said for setting short and long-term goals.

Stephanie Genkin, a financial planner with TA Planners, agrees there is a link between power and savings, but not quite the way it’s presented by the researchers. "What I see often is that when I work with clients to increase their savings, whether it’s in a regular account, 401(k) or IRA, they report feeling more powerful (and happier) after hitting the $5,000 mark," says Genkin.

There’s also something to be said for setting short and long-term goals. "The more detailed you are, the better. Saving for the sake of saving is a losing proposition," says Genkin.

Some don’t get the power/savings link. "The idea that the key to encourage savings is to make people feel more ‘powerful’ is Keynesian claptrap from people in Washington and the academic think tanks," says attorney David Reischer.

Sometimes too, power is not enough. "There are many successful movie stars, musicians, professional athletes that are ‘powerful’ that end up bankrupt because of bad financial decisions, like spending more money than they make and not saving. They end up in massive debt which leads to bankruptcy," says Steve Repak, author of Dollars & Sense: Basic Training For Your Money.

One thing you’re not likely to find disagreement about, is the need to save. ‘Everyone sees the value of saving," says Gail Cunningham, spokesperson for the National Foundation for Credit Counseling.

Knowing and doing are two different things though. Says Cunningham, "How do we get the average person, who may be financially frozen, the one who is tired of trying, to move from the state of inertia to one of power? No one wants financial education until they need it, and by then it’s too late. Can we convince people that knowledge is power?"



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Comments
Anonymous
Anonymous   |     |   Comment #1
How do you encourage people to save? In this age of instant gratification, you have to be kidding!
Anonymous
Anonymous   |     |   Comment #2
The government forces most wage earners to "save" via social security deductions, promising lifetime payments past a certain age. Also, there are some politicians and academics who would love to force Americans into mandatory savings programs. For us, abject fear worked just fine as a motivator to save!
Gaelicwench
Gaelicwench   |     |   Comment #7
Except that now the right is wanting to privatize (via Wall Street's grubby little fingers) social security. Are you kidding me? Sure, the government's been putting in little IOUs in the SS coffers since LBJ to fund the 'Nam war, but people ARE still getting their checks each month.
Anonymous
Anonymous   |     |   Comment #3
Wanting to control my own destination was the motive for my saving. 
Anonymous
Anonymous   |     |   Comment #9
Agreed.  Good point!
Anonymous
Anonymous   |     |   Comment #4
i don't know how to encourage others to save, but i know what motivates me to save: fear of being broke.
Anonymous
Anonymous   |     |   Comment #5
One thing you don't do is allow the Federal Reserve tamper with interest rates and bring them down to near zero.  That move just encourages people not to save.  I believe the best way is to allow people to self-fund additional Social Security benefits.   
Anonymous
Anonymous   |     |   Comment #6
That's called an IRA or one of the other tax-deferred savings plans. There are plenty of options for people to build financial reserves.
Anonymous
Anonymous   |     |   Comment #12
I agree, but my aim was to eliminate the middleman, the brokers and insurance companies, and let the guarantee be a real guarantee both in interest rate and solvency, "full faith and credit of the US Governent", not projections or guarantees provided by the likes of AIG.
Anonymous
Anonymous   |     |   Comment #13
Buy T-bills.
Anonymous
Anonymous   |     |   Comment #8
We can self fund additional SS benefits--The opportunity is called IRA's. 
Anonymous
Anonymous   |     |   Comment #10
Laziness is what motivated me to become a saver.  I can recall being lazy even as a kid.  The old phrase, "Work is the curse of the leisure class", always resonated for me.  But I was not born into a wealthy family and criminal activity never seemed a good idea.

So I became a saver, instead.  Following college my sole desire was for retirement, but no dice.  It was financially impossible.  So I worked, saving at times close to 90% of my income.  I saved relentlessly and tirelessly.  Finally, at age forty, I reached my goal and retired.  It's been blissful, with not a single day of regret.  Sometimes, I guess, it's best to follow one's instincts.

Work is trying for lazy people like me.  The only way I made it through was by saving, knowing there would be relief sooner rather than later.  And I did work very hard, with long hours, to build up the requisite nest egg.  But I finally reached "escape velocity" and it has been orbital nirvana ever since.  Looking back, I'd do it again the same way in a heartbeat!!  And it was saving that made everything possible.  Saving was the key.

Course now Obama wants to take what I worked for so hard, and saved, and give it to other lazy people like me; except they don't want to work hard and save like I had to do to reach my goal.  Lazy as I've always been, and I hold the patent on that, I never, ever, expected other people to finance my retirement or to compensate me out of their labors to indulge my personal shortcoming.  I never foresaw that somebody like Obama would come along and want to redistribute my hard won, saved up, nest egg to persons who are not even Americans that come here illegally.  Until Obama began his second term, freed of concern for re-election, my retirement was looking really solid.  Now, I dunno.
Anonymous
Anonymous   |     |   Comment #11
Laziness is NOT what motivated me to become a saver.  My family was rich by no means.  We did not want for the basic necessities and had all we needed.  But not much extra.  I began saving at an early age while earning pocket change by doing chores around the neighborhood after school.  Believe me, we kids had nothing handed to us.  Looking back, I think that was a good thing.  By having to earn money, we learned the value of it and how to save and spend money wisely. My wife and I have been enjoying retirement for several years now and have no regrets.  And still feel financially secure do to my life long savings habit developed at a very early age.  Thank you dad and mom.