The key to saving more money for your future is putting off your investing until tomorrow. Yes, most financial advisers will tell you the best plan is to start saving today--as in right now, this second.
These financial experts (like your Dad) will go on to explain if you invest right now, the "miracle of compound interest" (or should we say the "former" miracle of compound interest since interest rates are only about 1 percent) will exponentially increase the value of your investment over the lifetime of your investing.
While your Dad's expert financial advice was mathematically sound, it is fundamentally wrong. In terms of human behavior, we are not designed to invest right now for a gain in the future. For most people, when you have 50 dollars in your hand, you want to spend it right now. You don't want to buy shares in some mutual fund so you can spend 55 dollars 30 years from now.
So, follow your gut and spend. In Richard Thaler's book Misbehaving, the Nobel Prize-winning economist explains why it is better to "Save More Tomorrow."
The 3 factors stopping you from investing more money now.
According to Thaler's book, there are three things that hold you back from following your Dad's smart financial advice: inertia, loss aversion, and self-control.
Inertia simply means you are unlikely to change your current non-investing behavior. If you weren't investing yesterday, you are not likely to invest today. Thaler explains surveys show we all know we should invest more for retirement, but since investment takes effort, we never do it.
Another distracter from financial freedom is loss aversion. We all hate to lose money. So taking money from your current paycheck and lowering the amount you can spend feels like losing income. Who wants a smaller paycheck?
Finally, we have no self-control when it comes to the present. If we have money now, we want to spend it now. Due to being "present biased," Thaler says you value the money you have in hand more than the money you will have tomorrow.
How to "Save More Tomorrow."
Understanding these three psychological obstacles is the key to Thaler's strategy of Saving More Tomorrow. If you want to invest more, the simple trick is to agree today to automatically invest more tomorrow.
Unfortunately, this method will only work if you have a way to do automatic investing with your company. So if you do, read up on company policies for how you can overcome your inertia, loss aversion, and self-control.
All you need to do is to agree to invest more money every time you get a pay raise. According to Thaler, agreeing to automatically invest when you have more money overcomes the three obstacles to investing.
First, there is no inertia because the investing is done automatically. Second, you feel no loss because you never became accustomed to that larger paycheck.. Finally, you overcome your self-control issues by making the investment decision before you ever have the money.
In a study with one firm who tried this method, the people who opted to Save More Tomorrow quadrupled their investment savings rate over four pay raises (from 3.5 to 13.6 percent), while those who declined to participate kept the same savings rate of about 6 percent.
So if you want to have more money for your future, ignore your Dad's advice and put off your saving until tomorrow.