Tap human behavior to boost savings

Human behavior can be a serious obstacle to improving the family's finances.

One example of this is "inertia." This means, very simply, that it's a whole lot easier to do nothing than to do something.

Over the years, we've seen financial institutions use the principle of inertia to their advantage-not ours. Take automatic rollovers on bank Certificates of Deposit. Why do you think so many banks automatically roll over your CD?

Answer: They figure that way, at renewal, it will be more trouble for you to withdraw your funds than to accept an interest rate that's lower than that of competitors.

Why do banks offer you better terms if you keep both a savings account and a checking account with them?

One answer: Inertia again. It's too much trouble for you to bother to unravel these relationships and move to another financial institution. Result: It's a lot easier for them, down the road, to keep your business-even if they raise your fees or lower your interest rates.

An excellent book, "Nudge (Penguin)," by Richard H. Thaler and Cass R. Sunstein, explains how choices you're presented can affect your financial performance. They cite many all-too-familiar principles of human behavior.

So why not turn the tables on financial institutions and use your human behavior, including inertia, to your family's financial advantage?

The authors, for example, advocate a "Save More Tomorrow" program for your retirement. With this program, you agree in advance to raise your 401 (k) or other retirement plan contribution with each pay raise you get.

This, the authors contend, is a painless way to dramatically boost your savings because it overcomes five psychological principles that underlie human behavior.

Those are:

• Many [401 (k)] participants say they think they should be saving more, and plan to save more, but never follow through.

• Self-control is easier to adopt if it takes place in the future. Many of us, they note, plan to start diets, but not today.

• People hate to see their paychecks go down.

• People fail to consider the full impact of inflation when calculating financial losses.

• Inertia is powerful.

"By synchronizing pay raises and savings increases, participants never see their take-home pay amounts go down," the two say. Plus, "they don't view their increased retirement contributions as losses."

"Once someone joins the program, the savings increases are automatic, using inertia to increase savings rather than prevent savings."

The authors note that a number of 401 (k) plans offer a type of "Save for Tomorrow" program, which can make a dramatic difference in your ultimate financial well-being.

The two report that a mid-size manufacturing company tried this approach with three groups in 1998. The group that started with the lowest savings rate-around 3.5 percent of income, quadrupled their savings rate to 13.6 percent over 3.5 years and four pay raises later!

Another idea for using the principle of inertia to your advantage: Sign up for automatic contributions to a savings or investment account. This way, your savings plan is on automatic pilot. You'll need to overcome the principal of inertia if you wish to stop saving.

We both have been using this tactic for many years, and can testify that it not only works, but we never even missed those funds from our checking accounts!

Spouses Gail Liberman and Alan Lavine are syndicated columnists. Their latest book is "Quick Steps to Financial Stability" (Que/Penguin). You can contact them at www.moneycouple.com.