September 11, 2012
Motivation to Save: A Simple Solution?
Quiz: by socking away $400 per month, earning 10 percent on your money, you can save $302,412 in 20 years. So, how much would you have in that same account in 40 years?
Yes, it’s more than double. But how much more?
Most Americans can’t do the math, explains Craig McKenzie of the University of California, San Diego’s Rady School of Management, in this video. And if they can’t do the math, then they are unable to comprehend how much easier their lives would be if they took advantage of the enormous benefits of starting to save early for their retirement.
That’s hardly surprising. What is surprising, however, is that McKenzie, a cognitive psychologist by training, experimented with a “simple, straightforward intervention” to get the point across to research subjects of the large boost to saving of earning compound interest over many years. Even better, it succeeded in motivating them to save, he said.
The solution is, as promised, simple – so easy that employers who offer 401ks, as well as mutual fund companies, banks and credit unions, could easily implement it.
To learn about how it works, watch this video in which he presents his findings at Rand Corp.’s 2012 Behavioral Finance Forum in Washington in July. To watch other conference videos, go to Rand’s website.
P.S. The answer to the question in the first paragraph is $2,336,889.
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This reminds me of one of my mantras: “Things are much simpler if you don’t make them complicated.” Simply showing people the end result of a certain course of action is more motivating than making sure they understand the concepts behind it. Fascinating!!
Thanks so much for sharing – I will be using this in my work without a doubt.
Perhaps people are smarter than this video implies. Thanks to the FED, savers get 0% interest today, which means there is ABSOLUTELY NO REASON TO START EARLY, because there is no interest to compound. These experiments assume either 5% or 10% returns, which is a completely unrealistic assumption today.
I feel Maynard missed a major point in the presentation. The speaker used the term “interest” which Maynard is equating with the puny interest currently available via our friendly banks. It is not as impossible to earn a “RETURN” approaching or exceeding even 10% when “investing” (not putting money into a savings account. By focusing on “return” rather than “interest” then the points made in the presentation are still most valid. Simply put, invest early and earn a better return and your (return or interest) earned is fantastically better than delaying the investment for retirement in all cases. Now a new variable comes in of course, the RISK factor… but that’s another story which really doesn’t disprove the points made in the presentation. My own retirement account was over 34 years of investing at differing rates of return (or loss) but a graph of my account balance looks remarkably similar to the 40 years/$100 per month at 10% shown here.
What get’s my attention in calculations like this one is the expected yearly return on invested money. 10% is quite realistic, although I would say that since the last financial crisis, our appetites have lowered towards 7-8%. I do, however, understand that compound interests have a much more powerful effect with higher interest rate.