You probably have lofty goals and high hopes for your financial future.
Forget about them.
New research suggests that, when it comes to saving, a cyclical mindset trumps linear, goal-oriented thinking. People tend to save more money when they think about the present instead of the future, researchers found.
“When people focus on the present, they focus on what they can do now, rather than what they would like to do in the future,” says the study’s author, Leona Tam. “When the focus is on the present, actions are taken rather than procrastination.”
Tam is an associate professor of marketing at the University of Wollongong in Australia who, along with her colleague Utpal Dholakia, published the study, “Saving in Cycles: How to Get People to Save More Money .”
Some background: Western culture tends to think of time as linear: progress, happy endings, climbing corporate ladders, etc.
“Americans tend to be linear in their time orientation,” Tam says. “However, we believe people can change their time orientation to be a learned habit.”
The paper explains that linear thinking promotes the hope that someday, things will be different. You’re probably familiar with the thought process: “I’ll make more money one day. When I’m rich, I’ll save more.”
Linear thinking is the reason some people don’t even think about saving for retirement until they hit 40. A “when I’m rich” mentality promotes procrastination, abstract goals and unrealistic predictions about saving.
In contrast, cyclical thinking assumes that this is as good as it gets. Tomorrow will be the same as today. If it helps, think Bill Murray in “Groundhog Day.”
I’ll admit, it’s kind of a depressing thought, but this mindset does favor implementation over optimism. More “Just do it!” and less “I’ll do it when things get better.”
And it works. Here’s what researchers found:
Across the studies, individuals using our proposed cyclical savings method … save an average of 78% more money when compared to those using a linear savings method.
If you were rolling your eyes before, I’m betting that percentage got your attention.
An experiment in saving
Tam and Dholakia separated their subjects into three groups: cyclical, linear and the control group. They gave the cyclical group the following instruction:
“Make your savings task a routinized one: just focus on saving the amount that you want to save now, not next month, not next year. Think about whether you saved enough money during your last paycheck cycle. If you saved as much as you wanted, continue with your persistence. If you did not save enough, make it up this time, with the current paycheck cycle.”
The linear group’s instruction:
“Make your savings a planned one: just focus on the total amount of your savings goal for the future. Think about discrete savings tasks and do each task one day at a time. Do not think about what you have or have not saved in the past.”
The control group didn’t have any instruction at all. From there, subjects were asked to keep track of their savings for two weeks and then report “how much money they had saved and the extent to which they applied the savings method explained to them.”
Here’s the unsurprising part: Cyclical savers reported saving cyclically, and linear savers reported saving linearly. Here’s what was surprising: Cyclical savers saved an average of $223, whereas the linears saved $140. The control group saved $133.
As someone who wants to save more, this is great news. As someone who writes about money, I can’t help but facepalm. I’ve read an endless amount of savings advice in an endless amount of personal finance books and blogs, and the whole time, the key to saving significantly more money can be summed up in one simple sentence:
“Focus on saving the amount that you want to save now, not next month, not next year.”
Testing ‘cyclical’ versus ‘linear’ saving on myself
Of course, I had to put this thought process to the test. I asked Tam how someone might get started.
“We suggest people start looking into each paycheck and see how much they can save from there. Without setting a long term goal, set up a per-paycheck goal and stick to it. If she or he falls behind in the last paycheck in terms of saving, catch up now, in the current cycle.”
I decided to apply the cyclical mindset to my saving for retirement. In Mint, I have a retirement goal set up that includes the total amount I want to save based on a certain date. I ignored it. I re-read the instructions and applied it to my retirement savings. I asked myself, “If this is how much I’m going to make everyday for the rest of my life, how much do I want to save now?”
To make sure I had enough to save, I applied the same tactic to my budget. “If this is how much I’m going to make forever, how much am I willing to spend on food, entertainment, shopping, etc?”
In short, I made a budget and savings goal based on the idea that this is as good as it gets. I only checked Mint to make sure I was staying within my budget; I ignored my goals.
As a freelancer, my income is highly variable. For example, last month, I earned about eight times less than I did in October. Because my income is so wonky, when describing my own little test, it isn’t really helpful to talk about specific amounts, but percentages.
After saving my cyclically set amount at the end of the month, I calculated the percentage I’d managed to put aside: 20 percent.
Then, I looked at my savings amounts of the past — when I saved linearly, based on my goals. While I did save a lot, the amount was only eight percent of my income. Granted, my situation was much different from one month to the next, but still: that’s a big difference.
Something happens when you stop thinking about what you want to save in the future and instead focus on what you can save now. You get out of fantasyland and instead think about reality.
“The cyclical mindset does not endorse a progressively improving life pattern,” said Tam. “Thus the decision maker will be less optimistic (and prone to) defer saving money.
Of course, I still think goals have a place in personal finance. Money issues are often based on mindset, and because we like to look to the future, it helps to have goals and consider our future finances. Goals keep us optimistic, and optimism is helpful and great. But when it comes to saving, implementation is better.
For the sake of saving, it’s worth a shot to go “Groundhog Day” on your finances.
(GIF: Cheezburger Network)