Tuesday, August 12th, 2008...10:53 pm

Nudge: Save and Give More Later

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Charitable Donations

Creative Commons License photo figure credit: nancycallahan

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!


  • Perhaps giving would also be easier if you had a specific plan for who you will give the money to. My DH and I are more excited once we chose our top 4 charities (now expanded to 6 I think). It was easier to commit to $300/year/charity when we knew that money was going to the Humane Society, WI Public Radio, and umm…I forget now what else we started with. It’s changed over the years. Just recently, I also put into Quicken the specific months to send a check to each place so that I don’t end up with 100s of dollars to send out all at once in Dec. The charities appreciate this too–they would rather get their donations spread throughout the year than clustered at the end of the year. We started by saying general categories we wanted to support–children, animals, public radio, and something else. We ended up having us each choose one (with approval from the other, for instance DH doesn’t care about The Elephant Sanctuary I’d like to donate to, but he agreed with my choice for a child-focused charity) and choosing the other two together. We also have a small amount that’s for “whatever comes up” so that we can do the donations throughout the year for the things like you listed with friends.

  • I think you’re right about choosing a charity. However I have heard that the best way to give is in a large enough amount to make it worthwhile to the charity. Many times when people give small amounts, the charities end up spending more money soliciting more contributions than the original contribution. So we’ll be saving up to make it worthwhile and maybe choosing more than one charity.

    Thanks for stopping by and contributing!