In this column dated December 15, 2013 we discussed how you can apply the goal-gradient hypothesis to improve your savings. This hypothesis states that you will work harder towards achieving your goal when you are closer to your target than when you are at a distance. That is, you will save more when you are within, say, five years of your retirement than when you are 25 years away.

Picture this. You are planning a vacation with your family for next summer. You would think about where to vacation and the fun you will have with your family. But what if you are vacationing next week? Your thoughts would then be focused on how to schedule day trips from the hotel to nearby tourist attractions and which restaurants to visit and so on.

In other words, distant goals evoke abstract thoughts whereas near-term goals trigger specific responses. Besides, distant goals are driven by desire (why the goal is important) while near-term goals are driven by feasibility (how to achieve the goal). In social psychology, this relationship between psychological distance of the object or goal and your thinking about it is explained by the temporal construal theory. The distant goals are high-level construal while the near-term goals are low-level construal.

So, how can temporal construal theory help understanding your savings habit? Now, consuming today can give you satisfaction whereas saving today delays gratification. So, retirement costs (postponing current consumption) are low-level construal while retirement savings are high-level construal.

You can motivate yourself to save for your retirement by converting the high-level construal into low-level construal. Why? Remember, low-level construal compels you to focus on steps you should take to achieve a goal — how much should I save for my retirement or which equity fund should I buy or should I ask the car to come to the hotel at 8 a.m. when we are on vacation next week.

Retirement account In the case of your retirement, converting high-level construal to low-level construal requires you to set milestones. You may, for instance, desire to accumulate Rs 25 lakh in your retirement account in the first 10 years of your working life. Once you set a milestone, goal-gradient hypothesis will work in your favour. That is, you will work hard towards achieving your goal as you come closer to accumulating Rs 25 lakh.

Once you work towards your first milestone for a distant goal, such as your retirement savings, you will be more inclined towards working on your subsequent milestones. Setting up a systematic investment plan then becomes easy.

(The author is the founder of Navera Consulting. Feedback may be sent to > knowledge@thehindu.co.in )

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