If you want to lose 10 pounds, you need to consume 35,000 fewer calories over the course of a couple of months. Sound intimidating? What if it were framed like this?: To lose 10 pounds, trim 500 calories a day from your diet for a couple of months.
Same goal. Same timeframe. Same results. The only difference is the level of granularity in which the goal is expressed.
According to a new study, the way you frame a goal — in this case, smaller is better — can dramatically affect the likelihood you’ll achieve it.
What does calorie cutting have to do with savings goals?
A new research study out of the University of California, Los Angeles (UCLA) and the University of London (published in the INFORMS journal, Marketing Science,. shows that the same mental re-framing also works when applied to personal finances.
The researchers tested the approach with 2,000 Acorns customers, an app that allows customers to save and invest small amounts of money. New users who signed up for Acorns’ recurring deposit program were randomly offered the choice of committing to monthly deposits of $150, daily $5 deposits or weekly $35 deposits.
Quadruple the number of consumers enrolled in the recurring deposit program when presented with the option of smaller, daily deposits.
Here’s what happened: Savers were more likely to commit to — and stick with — a personal savings regimen focused on smaller, daily amounts over the large, intimidating per-month goal. In fact, quadruple the number of consumers chose to enroll in the recurring deposit program when given the $5-a-day option versus the $150-a-month savings goal.
The appeal of the granular savings option also leveled the playing field between low- and high-income consumers.
When presented with the $150-a-month savings program, higher-income consumers signed up at a rate of three times more than lower-income consumers. When deposits were framed as $5 a day — which also gets you to $150 after a month — the participation gap was completely eliminated.
Perception — and convenience — is everything
It’s not a huge stretch to see why breaking down larger-dollar goals into bite-sized chunks is more digestible. Big numbers — like saving $1 million for retirement — are discouraging. Even when we fully know amassing enough money for retirement is supposed to take decades.
One thing that keeps a lot of us on the sidelines is how we measure the opportunity cost. Putting away a dollar tomorrow means one less dollar to spend today. However, the study’s authors posit that the mental calculation of $5 a day is much easier to overcome. It’s a comparatively small sacrifice (giving up a deli sandwich or fappelatte) than mustering up the resolve to part with $150 all at once.
Your savings cadence can also impact your willingness to commit to automatic deposits.
“… even though they may have to give up an expenditure or two, there are still plenty of other items that fall under the umbrella of $5 per day that could still be purchased,” the authors write. “However, when considering what would need to be given up to make a $150 per month contribution to a saving account, there could be fewer comparisons, leading to an overall sense that a contribution of this magnitude would be more restrictive.”
Your savings cadence (the frequency with which you’re willing to sock away money) can also impact your willingness to commit to automatic deposits. That ties in with how often you’re paid — monthly, weekly, daily.
“Today contributions are often framed in terms that reflect traditional paycheck and banking norms where money is only transferred from one account to another on a monthly basis,” according to the authors. However, if you’re a gig worker, freelancer or self-employed, monthly savings goals may not be relatable — or realistic. Pay schedules and amounts aren’t always consistent. Similarly, household budgets aren’t necessarily determined in terms of monthly income.
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Reframe your savings goals
If you’re facing a savings goal that seems insurmountable, cut it down to a less intimidating size with some relatively simple math:
$8 a day to wipe out a $500 credit card balance: Stop letting that lingering balance give you indigestion. You can knock it back to $0 in two months for just the cost of a daily artisanal sandwich. (Here’s more on how to strategically manage your debt.)
$11 a day to amass a $2,000 emergency fund: Sock away your spare dollars for six months, and by April you’ll be sitting on a healthy $2,000 cash cushion to soften the blow of any unexpected expenses that come your way. Need longer to come up with that amount? A smidge over $5 a day gets you there a year from now.
$16.50 a day to max out your IRA: The IRS allows you to contribute a maximum of $6,000 a year to a Roth or traditional IRA. (It’s $7,000 if you’re over age 50). You’ll have to save $500 a month to do it in 12 months. Sound like too much? What about $115 a week, or $16.50 a day?
We can cut your daily IRA savings goal even further since the IRS gives you until the tax filing deadline — April 15 — to make your contribution. That’s an extra four and a half months, which brings your weekly savings goal to roughly $90, or less than $13 a day.
$9.65 a day to get your company’s 401(k) match: If your employer matches a portion of your workplace retirement plan contributions, grab it! That’s free money — a savings reward that doubles your contribution right out of the gate. The average 401(k) matching contribution is around 4.7% of an employee’s salary. In order to get that match, you must contribute the same amount. So, if you make $75,000 a year, the maximum match would be $3,525. That’s $9.65 a day. Just remember that if you’re contributing to a traditional 401(k) (instead of a Roth) that money comes out of your paycheck before taxes take a bite. So that $9.65 you’re directing into your workplace retirement account will feel like less than $8 coming out of your paycheck.
$9.86 a day to max out an individual HSA: If you’re enrolled in a high-deductible healthcare plan you may be eligible to contribute to a Health Savings Account (HSA). There is a lot to like about these accounts, especially the ability to use the money as a retirement savings safety net. Unlike a flexible spending account (FSA), there are no use-it-or-lose-it rules. So you can build up the balance gradually as long as you’re eligible to contribute. If you’re funding an individual account, sock away $9.86 a day and you can max out an HSA up to the $3,600 limit for 2021. It’s double that ($7,200, or $19.72 a day) for families.
Any daily amount to fund a Christmas Club or family vacation: Wouldn’t it feel nice to ring in the new year without a balance on your credit card from purchasing holiday gifts? Or to take a post-pandemic vacation paid for in cash? Figure out roughly how much you’re going to spend and divide the amount by the number of days you want to give yourself to reach the goal.
Even if you don’t set up automatic daily transfers of small amounts of money right away — or if you decide to do it on a weekly or monthly basis instead — planting that bite-sized savings goal will help your brain see a way around any obstacles.
Read next on HerMoney.com:
- Behavioral finance expert Dan Ariely on psychological tricks to master your money — even during the stress of a pandemic
- Charles Duhigg on how to keep good habits while working from home
- Financial Therapist Amanda Clayman on staying financially and mentally healthy
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