A couple of weeks ago I reviewed Nudge: Improving Decisions about Health, Wealth, and Happiness by Richard H. Thaler and Cass R. Sunstein. I wanted to take some time to explore two of the big personal finance concepts in this book: Saving and Giving more later.
Nudge details a study that shows that 401(k) participants who attended a seminar on retirement savings and why they are so important were still reluctant to increase their participation in the plan. However, when presented with an option to increase contributions in the future, a large number of them agreed. A few months into the program, participants automatically started having an additional 1%-2% of their paychecks funneled into their 401(k) plans. Additional increases occurred periodically, every 6 months to a year, until the participant had reached the contribution limit. Most participants stayed in the program.
For some reason, people resist the idea of giving up money now, even if it is ultimately in their best interest. However, most have no problem with committing to contributions at some point in the future. Perhaps future money is sufficiently abstract that as long as we’re just dreaming about it, we can be convinced to do anything with it. Maybe this is why “No Money Down, No Payments for 90 Days” financing offers are so popular as well.
As I am learning in Getting Things Done, the book I am currently reading, people are too often paralyzed with the idea of starting a big project. This is because they often look at the project as a whole instead of seeing just what needs to be done next — the Next Step. I think that this is what drives a lot of the resistance to increasing 401(k) or emergency fund contributions. Most people hear that you should be saving 10% or 20% for retirement and get discouraged because they’re not saving anything. From the standpoint of 0%, 10% looks impossible.
Mathematics tells us that there are an infinite number of increments between 0 and 10. This leaves A LOT of opportunity to take the Next Step towards a savings goal. Most of us can also easily absorb a 1% reduction is gross pay, and if we can’t, then we can try 0.5% or even 0.25%. But something is better than nothing as a first step, and starting today is better than starting tomorrow.
A similar concept to Save More Later is suggested in the book for charitable contributions. Right now, ScrapperMom and I have no set plan for charitable giving. Usually the bulk of our giving ends up being sponsorships of friends and family in some walk, run, or flower sale of some kind or another. This is irregular, typically doesn’t amount to much, and doesn’t go to any charity that we actually get to pick. It’s also hard to stomach a big hit in our current spending plan. However, our daughter’s Money Savvy Pig[gy] bank has a slot marked “Donate” on it, so if for no other reason than not to be a couple of big hypocrites, we probably should start to make some effort in this direction. (Don’t get me wrong here, there are much better reasons…)
Enter the Give More Later concept. This works pretty much the same way as Save More Later. Start with whatever charitable contributions you are making now, and commit to increasing this contribution at some point in the future.
Okay, easy enough, right? Not quite. The same inertia that’s keeping me from starting a charitable contribution plan now is the same one that’s going to keep me from Giving More Later. Because if I wait until the day for which I have committed to increase my contributions, it will be the same situation as today. Fortunately, there are some easy ways to give more later. For example, I just logged into my ING Direct account, created a Charitable Giving sub-account, and then set up an automatic monthly transfer of about 0.5% of our income — to start in January of 2009. I also created a calendar entry in March of 2009 to remind me to increase or create a new automatic transfer for some point in the future. As Getting Things Done would say, I have “installed a new trick” in my finances.
Can you afford to save or give more later? Check with your 401(k) manager to see if there is an option to do this if you’ve been meaning to save more, but just haven’t been able to get around to it. If you don’t have this option in your plan, you can create a calendar entry for sometime in the future. Or you may be able to give instructions to your Human Resources department to increase your contributions for you at some time in the future, or to make contribution increases on your behalf whenever you get a raise.
Do you think a strategy like this would work for you? Do you have a better idea for how to save or give more later? Let’s hear about it in the Comments below!
Reminder:You still have 3 days to get your entries in for the Don’t Feed the Alligators Giveaway!
If you liked this article, you may be interested in seeing some related articles:
Can you believe it’s August already? This weekend we’re relaxing with friends at their home in New Jersey. In the meantime, I hope you enjoy the following:
Hank at MyInvestingBlog.com asks the question:
“If you were given $50,000 USD (tax free) today, what would you spend it on?”
I went back and forth on this question. The prudent thing to do would be to pay off the remainder of our low interest debts. The “dream basket” thing to do would be to use it for a down payment on a single family home, keeping our multi-family as an investment property. Paying off our debt would still leave half the money, and with the monthly payments on the debt gone, it would take us only 12 months to save that amount again, which is well within a reasonable amount of time to find and act on a new house. What would you do? Leave a comment here and then head over to the original article to enter for a chance to win an American Express gift card. If you leave a comment there, let me know!
Some other articles that caught my attention this week were:
- Rocketc wonders if a frugal culture exists at your work place. He feels obligated to eat out with coworkers for fear of missing important business discussions that may ultimately further his career. My office is split between go-outers and brown-baggers, but nearly everyone eats at the office. I admit to feeling not so much peer pressured, but food pressured to be a go-outer, but it’s better for my wallet and my waistline to be a brown-bagger.
- Boston.com presents a scary article about how many workers are breaking the retirement piggy bank. It’s almost never a good idea to use retirement money for anything but retirement. But you knew that already.
- J.D. writes about How to Cope with a Lousy 401k Plan. Most of us don’t realize that the plan we have through our job is not the work’s plan, it’s our plan, and we all have the power to change it, especially if we band together with coworkers. Many of these plans aren’t set up by financial experts, and very often the administrators are sold a bill of goods. A little research followed by a little bit of squeaky-wheeling, so to speak, can make a major impact on the size of your nest egg.
- David posted a list of state sales tax holidays. Tax holidays are a great way to save — especially on big ticket items. However, one should be sure that (a) This item is in your spending plan and not a splurge item (since otherwise you will have not saved anything…) and (b) that you know what the regular price of the item is and what a typical sale price is. In my experience, many stores have no sales on Tax Holidays and bring all of their sale prices back to full price. In many cases, you can actually save more money on the weekend before or after the tax holiday than on the holiday itself for this very reason.
- Finally, PaidTwice wonders about how much your time is really worth. I, too, have always been skeptical about arguments like this. The key here is to set the baseline appropriately: the choice is between earning $0 and something, not between your regular hourly wage and something. I don’t buy PT’s advice on earning hundreds of dollars per hour since in most cases you can’t actually do that. Yes, you might save a few dollars clipping coupons for a few minutes, but that’s not the same thing as earning $25/hour.
If you liked this article, you may be interested in seeing some related articles:
I went back to the data mine this week to see how our current heating and electric bills compare to those from the same period in the prior year.
In 2007, we had a number of circumstances that affect our heating and electric bills change, some for the positive and some for the negative:
- ScrapperMom was on maternity leave for 3 months at the beginning of the year. This resulted in a higher demand for heat and electricity, especially since there were now more loads of laundry each week.
- After her maternity leave ended, she took a new job that allows her to work from home. This extended the added demand for heating and cooling.
- We replaced our older boiler with a state of the art Micro-Combined Heat and Power system. This reduced both our heating and electrical costs.
- We set up an office for ScrapperMom in the basement. The basement was previously heated with electric heat, so to take advantage of the new Micro-CHP system we converted the basement over to hydronic baseboard heating.
- We decided to try an experiment:cross-tie our heating system with that of our rental unit to see if we could offer heat and hot water at a higher efficiency than the rental heating system, but still keep costs even or come out ahead.
When our rental apartment became available last fall, we listed it on Craigslist for $1250 per month. The previous tenant had paid $1200 per month for the prior 2 years. This monthly fee did not include heat and hot water. After a few weeks of nothing but nibbles at the $1250 price, our new boiler was installed. We set up the cross-tie with the other boiler and then listed the apartment for $1300 with heat and hot water included. The previous tenant paid a little under $1100 per year for gas (heat, hot water, stove/oven), so the extra $1200 per year in rent should have been enough to cover the additional costs that we would be incurring to heat the apartment — especially considering that the replacement boiler is more efficient than its predecessor.
What we found was a large increase in responses to our advertisement when we listed the apartment for more money but included heat and hot water. In this case, the difference in rent (presumably) more than covered the additional costs to provide the heat. I certainly didn’t expect it to make nearly the difference that it did. My best guesses as to why so many people were willing to pay a fixed cost for heat and hot water are:
- When moving into a new apartment, people generally have no way to tell how expensive heating is going to be. It could be a super-insulated unit with very low costs, or more likely an older, drafty apartment that costs a small fortune to heat.
- People recognize to a certain degree that they are bad at budgeting for costs that can vary dramatically from month to month over the course of the year and can handle it much better if they simply paid a fixed monthly rate all year round. I suspect it is this very concept that has prompted our local gas utility to offer what it calls “Balanced Billing” which estimates your annual bill and then breaks it down into even monthly payments so that you might still pay $125 per month in the summer, but you avoid a $350 bill in January.
Before simply cross-tying the heating systems, I thought of a couple of different ways to account for using one boiler to provide heat for the whole house. Obviously solution number one is to figure out what it cost to heat the apartment with the old boiler and then charge a flat rate based on that. The obvious downside to flat billing is that there is no “nudge” to conserve by relating consumption to payment, but since the apartment in question has a relatively low heat loss, even cranking up the heat will result in little additional fuel usage.
Another solution would have been to purchase BTU meters for each heating zone. Since there are 4 heating zones in the house, a BTU meter on each would indicate what percentage of the bill for heating was used by each zone. Once this information is known, actual bills for each apartment can be calculated. Tying the actual consumption to actual price would help on the conservation side, but the cost is over $500 per BTU meter.
Now that I have a full heating season worth of data, let’s look at the results. For the last year, our cost of heating for the rental unit has increased by about $600 (as compared to a tenant paying the bill). The cost for heating our apartment and the basement has risen by about $300. The electric cost for both our unit and the public areas of the house has risen slightly, which brings the overall utility increase for the house to $1070 for the year. Clearly this indicates that not only does the $1200 per year in extra rent cover the cost of heat and hot water, but it also covers (indirectly) the increased cost in our utilities as well.
The bottom line in all of this is that offering heat and hot water in a rental unit increases the amount of interest which decreases the amount of time it sits unrented. Also, the market will bear more than the actual cost of the utilities for the peace of mind of not having to guess what they will cost and not having to budget for big bills in the winter and smaller ones in the summer. Lastly, by tying the apartment heating into the new boiler setup, the cost to heat the apartment was reduced drastically.
What do you think?
If you liked this article, you may be interested in seeing some related articles:
photo figure credit: nancycallahan
