Saving for distant goals

Most of us would like to save more for our retirement, but do not end up doing so. Saving is a function of current consumption – less you consume your current income, more you save for the future. The problem is that, as humans, we often prefer instant gratification to future benefits. How can we save more despite our inherent desire for instant gratification?

It turns out that behavioural psychology can help us in our endeavour. You may have noticed that individuals who are above 50, typically save more than individuals who are in their late twenties. Of course, one reason is that individuals in their fifties earn more and have, perhaps, lesser loan repayments. But these individuals are also closer to retirement. With the goal (retirement) in sight, these individuals save more and work harder to accumulate the required wealth to retire comfortably.

This behaviour to work harder when the goal is in sight has been studied by psychologists. A researcher in the 1930s found that rats run faster when they are closer to a food box. The researcher called this behaviour the goal-gradient hypothesis. More recently, researchers have showed that humans behave the same way. As part of a customer loyalty programme, individuals visiting a coffee shop were offered a free coffee for every 10 coffees consumed. To keep track of their consumption, each customer was given a card. The card would be stamped each time they consumed coffee. Researchers found that customers increased their coffee consumption when they were closer to getting 10 stamps and slowed down when they were farther away!

Break it up How can you apply this behaviour to save more for your retirement? Suppose you plan to retire in 30 years. You can divide 30 years into smaller periods of, say, 10 years. You can then work towards accumulating wealth for each 10-year period. How does this help? Applying the goal-gradient hypothesis, a near-term goal is likely to help you stay more focused than a distant target.

You can make near-term goals more appealing by mapping them to consumption. That is, relate each 10-year short-term goal to a post-retirement consumption. After all, you are saving today to spend the money during your retired years. You can relate your first 10-year short-term savings to leisure consumption. It will motivate you to save for your retirement. If anything, we look forward most to travelling during our retirement. Besides, you incur leisure expenses, typically during the first 5-10 years of retirement. Once you focus on your first short-term savings period, you may be able to create a savings habit early in your career.

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

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