A survey found around 62% of Americans don’t have $1,000 saved.
If we followed Odysseus’ example and eliminated our future options, our finances might improve.
In the Odyssey when Odysseus approached the Sirens, he had his men tie him to the ship and plug his ears with beeswax. He knew that no one was able to escape the Sirens’ song.
If given the chance, he too would fall for their song, so he prepared for it by taking away all his future options.
Saving Money is Hard
Let’s face it, most of us aren’t doing a great job at saving money. However, it’s not for lack of trying.
Instinctively we know that it’s important to save for retirement or college, but it never seems to help. When you’re alone, taking a cold, hard look at your household budget, you resolve to save more. You may even come up with a great savings plan.
BUT, in the heat of the moment when you come face to face with the iPhone X?
BOOM! There goes $1,000.
I’ve written about money saving tips before – whether it was gamifying your savings or putting your finances on autopilot. Why both work so well, is the same reason Odysseus could conquer the Sirens song. They are commitment devices.
Commitment devices are ways to prevent your present self from sabotaging your future self.
Us vs. Ourselves
One of the main reasons commitment devices are so effective is because they eliminate our future options. Let’s face it, we are our own worst enemies
We are all susceptible to present bias in which we prioritize our current wants over our longer-term goals. It turns out the problem are present selves don’t view our future selves as the same person.
Hal Hershfield, a social psychologist at UCLA did a study that showed people “feel a sense of emotional disconnect from their future selves.”
While at first, this may seem a little far-fetched, just think about it for a minute. Close your eyes and try to imagine yourself 20 or 30 years from now. Picture yourself living the perfect retirement. Do you really think of that person as you or is it more like a generic elderly person?
I think the same could be said for our past selves. I know when I think about my childhood, often the memories are vague and don’t really feel like it was me in them. Have you had the same experiences?
If there are questions about our connection to the past, it makes sense we would have trouble connecting with the future as well. That’s why it’s so easy to get wrapped up in the present. The present is now, and we can we be sure it’s our current selves living it.
Commitment devices are ways to prevent your present self from sabotaging your future self
Securing the Future
To overcome this present bias, we need commitment devices. In those moments when we are thinking about our future, we need to lock ourselves into a set action. Take automatic increases to your 401k contribution.
When you start a new job and sign up for your 401k you may be given the option for automatic, yearly increases. Since you are signing up for a 401k, chances are you are thinking about saving for retirement. So, you are likely to think saving more each year is a good idea.
By signing up right then for automatic yearly increases to your contributions, you are limiting your future decision making and committing to saving.
If instead, you didn’t sign up, chances are you would be less likely to increase your contribution next year. Because let’s face it, you need the money more today than that 65-year-old guy down the road right? Wrong!
Another way to commit to a savings goal is to make a bet with a friend. Each of you comes up with a savings goal and the loser has to buy lunch. This may not seem like much, but the next time you are out, you’ll think twice about spending money on something you don’t need.
While it might be nice to buy a new pair of shoes, you don’t want to be the one to buy lunch. You committed in the present to protect your future.
Best Way to Save Money
Commitment devices are nothing new, but they still have powerful implications for our finances. While it may seem counterintuitive to eliminate your future options, when it comes to saving, it is often the best option.
So, the next time you decide to save more for retirement, pause. Decide which safeguards you’ll put in place to stop your present self from sabotaging your future self. And make the change. For good.
What’s a commitment device you’ve used? Let me know in the comments.