In 2022, a study by the Consumer Financial Protection Bureau examined how people used different automated saving rules and how those approaches were associated with their savings outcomes.
The researchers found that people using guaranteed saving rules such as automatically saving every payday, saw approximately 1.5 to 3.5 times greater increases in maximum savings and likelihood of reaching savings milestones than those using contingent rules, such as saving when certain spending transactions occurred.
While the study does not establish that automation alone caused those results, it points to something important: creating a predetermined structure for saving was associated with better savings outcomes.
And that is the part that interests me.
Whether you earn a little or a lot, whether you know everything about investing or are only beginning to understand your finances, you still have to make the decision to put money aside. When you remove yourself from having to repeatedly make that decision, you make consistency easier.
You make the decision once and remove yourself from having to make it again.
Economists Richard Thaler and Shlomo Benartzi explored a similar behavioral problem in their Save More Tomorrow™ program, published in the Journal of Political Economy. Rather than treating saving simply as a problem of knowledge or motivation, they designed the program around behavioral barriers including self-control and loss aversion.
Participants committed in advance to increasing their retirement contributions whenever they received future pay raises. Among participants who remained in the program through four pay raises, average saving rates increased from 3.5% to 13.6% over 40 months.
They had already made the decision. The structure carried it forward.
The mechanism was structure and not mere motivation.
Here’s what that means in plain terms:
Most of us approach saving like a willpower problem. We read the books, understand the principles, know what we should be doing, and still don’t do it consistently. So we conclude the issue is discipline. But maybe we are asking discipline to do a job that structure can do better.
When saving requires a daily decision, most people don’t save daily. When saving requires no decision at all, most people save without thinking about it. The money moves without waiting for you to feel disciplined.
This means the habit is not built through motivation, but by engineering the path of least resistance.
The path of least resistance is the easiest way to do something. It is the choice or action that takes the least energy, effort, and trouble.
Behavior follows structure more than intention.
Warren Buffett said:
My wealth has come from a combination of living in America, some lucky genes, and compound interest.
The compound interest part only works if the money is consistently going somewhere it can grow. And consistency does not come from trying harder every month. It can come from deciding once – a single decision made once, on a Sunday afternoon, that quietly compounded for years.
Set up the automatic transfer. Pick an amount, it doesn’t have to be large. Move it before you see it, before you can spend it, before the week’s expenses make it feel impossible. Then let consistency do it’s work.
The formula for building wealth is not a secret, it’s just not exciting enough for anyone to take seriously.
Your income minus your expenses, consistently invested over time, in things that grow.
Of course, what you invest in matters. Income matters. Risk matters. Time matters. But we keep looking for something more sophisticated than the basic principle because the truth feels too simple to work. Simple does not mean insignificant.
The embarrassingly simple part is many of us know this already but we keep looking for something more sophisticated than it actually is.
The CFPB research gives us good reason to take the structure of our saving habits seriously. Automatic saving rules (the ones that make saving happen consistently rather than waiting for another decision to trigger it) were associated with substantially better savings outcomes.
So perhaps the question isn’t:
“How do I become more disciplined with money?”
Perhaps the better question is:
“What can I automate so that I don’t need discipline to do it every time?”
Don’t rely on willpower for something a system can do for you.
So if you’ve been waiting to feel ready or feel disciplined, you don’t need to. You just need to build a system that bypasses your human flaws – set up the transfer today.
Make the decision once. Then get out of your own way and give consistency and time the opportunity to work.
Until the next note,
– STB
References:
- Consumer Financial Protection Bureau (CFPB), 2022 – Research on automatic savings effectiveness
- Thaler, R. & Benartzi, S. – Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving, Journal of Political Economy
- Warren Buffett – Fortune Magazine interview
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