Three cartoon piggy banks.


One Savings Goal Better Than Many

Saving money.  No financial behavior is more important in this era of DIY retirement planning.  And yet few things are more difficult for more people.

To prod low-income people to save a little, foundations and the government design clever financial products or incentives – some work, some don’t.  Academic researchers divine psychological tricks or behavioral mechanisms that might spur saving.  Automatic enrollment in employer-supported 401(k)s is one such success story.

A different solution to the savings conundrum comes from two marketing professors at the University of Toronto.  Experimenting on subjects around the world – residents of a small town in India, Canadian college students, parents in Hong Kong – they found that individuals are more successful savers if they identify and work toward a single goal.  Setting multiple, competing goals – college, retirement, summer vacation, a new kitchen, and the Christmas fund – was less effective and even counterproductive.

“When people have multiple goals, they cannot decide which one is more important,” said author Min Zhao, whose paper with Dilip Soman is forthcoming in December’s Journal of Marketing Research.  “They say, ‘I cannot decide. Maybe I’ll just do this later, and I might not do anything.’ ”

The explanation for this, said Zhao, is rooted in two mindsets required to achieve a goal: the “deliberative” and the “implementation” mindsets.  When an individual focuses on a single goal, he or she can immediately implement it by figuring out the steps to achieve it.  But savers with multiple goals must first weigh which of their competing goals takes priority.

Another twist is that the more difficult the goal is to achieve, and the higher the hurdles to action, the more effective a single goal becomes.

These are interesting findings that make a lot of sense but are tough to put into practice.  Other successful experiments on savings behavior lend themselves to real-world applications.  For example, Hal Hershfield at New York University found that if young people are shown a virtual, computerized image of their elderly selves, they’re more likely to save for retirement.  He’s now working with a major financial company to replicate this experiment and help its clients save.

But people have multiple savings goals because they have complex lives.  The reality is it’s impossible to eliminate that complexity and focus on a single goal: most parents, for example, would put a college savings fund, a house, and retirement at the top of their list.

Zhao suggests that people combine multiple goals under one neat, larger goal in their minds, say “future financial well-being.”  Whether or not this technique would work, her research contributes to our understanding of why we save – or, rather, why we often don’t.  And that’s an important step in changing our behavior.

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