Your New Year's Resolution to Save More: How to Make It Stick

Last Updated Dec 23, 2010 4:43 PM EST

Is saving more for retirement one of your New Year's resolutions? If so, you're not alone. According to a recent poll sponsored by Fidelity Investments, more than half of the survey respondents listed this goal as their top financial priority for 2011.

But can you make this resolution stick? Many people can't. In fact, it's all too common for people to make well-intentioned resolutions on January 1st that seem to lose priority in a few months -- or even a few weeks.

For a few tips on how to really stick to your New Year's resolutions, let's take a look at behavioral finance, a fascinating field that examines how your emotions influence your spending and saving. Along the way, you'll learn some fancy words that you can use to impress your friends.
  • Framing helps you make better day-to-day decisions by putting things in proper perspective. Narrow framing means that you tell yourself that your daily coffee only costs $3.95, so it's OK to keep buying it. But if you use broad framing, you instead tell yourself that your daily coffee might end up costing you more than $800 for the whole year, and that you'd be better off stashing that money in your IRA or 401k instead.
  • Hyperbolic discounting means that you might prefer smaller rewards you can get today over larger rewards you'll get at a much later time. So that $3.95 coffee gives you immediate satisfaction now, even though saving that amount every day can add up to tens of thousands of dollars over the course of many years. Here's a trick to help you save that money: Don't think that the coffee costs you $3.95. If you invested that amount, it could double if you invest it for retirement, so that daily coffee is really costing you more than seven bucks! Now is it really worth it?
  • Anecdotal evidence influences us to behave like people whom we see or read about. You can use this to your advantage by paying attention to people who seem to manage their finances well and by reading articles about techniques people use to save more. Ignore the spendthrifts you know and the advertisements that encourage you to spend on things you don't really need.
  • Ambiguity aversion and competence means that if you're confused about a topic, you tend to do nothing, either good or bad. Don't know how much to save for retirement? Don't let that stop you. Instead, go ahead and increase your savings by two, three, four percent, or more of your pay.
  • Status quo bias refers to the tendency to continue doing what you're doing now, and is something else you need to overcome. Rather than continuing to not save enough for retirement, tell yourself that doing so really translates to you making a choice to work until you're 80.
Now that you're revved up to save more for retirement, here are some practical ideas to free up some money without too much pain:
  • If you really like to start your day with coffee, form a coffee club at work. Get five people to each bring a pot of coffee one day per week. Then take that 15 minutes of waiting in line at your favorite coffee shop and instead meet at work to share coffee and friendship. Not only will you save some money, you'll also make some great friends -- and maybe share tips for planning your rest-of-life.
  • If you buy lunch during the week, form a lunch club with the same guidelines as the coffee club. And think about how you can help each other by providing anecdotal evidence regarding healthy habits.
  • Take a close look at your auto insurance; if you're a good driver, you can save hundreds of dollars a year by increasing your deductible.
  • Reduce your utility bill by tens or even hundreds of dollars each month. How? Dial down the house heating temperature, and dial up your refrigerator's temperature by a few degrees. Turn down the temperature on your water heater so you're comfortable in your shower using just the hot water valve.
I'm sure you have your own ideas about how to save more. Please help our readers by providing a few tips of your own on how to save more in the comment section below.

This is the first post in a series I'll publish on New Year's retirement resolutions and how to make them stick. If you take a few steps in January to establish good habits, you'll be well on your way to a more financially secure and enjoyable retirement. Take it one step at a time, and you'll see significant progress.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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