Hopefully you have established the habit of saving. That is an important first step but chances are you are not saving enough. The next step is to increase your savings rate, and a great way to do that is by putting yourself on what I call The Wimpy Savings Plan.
J. Wellington Wimpy was the memorable character in the Popeye cartoons that loved hamburgers but didn’t like paying for them. His catch phrase was “I’ll gladly pay you Tuesday for a hamburger today.” Unfortunately there is a little Wimpy in each of us.
It is human nature to want to enjoy something now but pay for it later. The massive credit card debt in the United States attests to this. Saving and investing is difficult because it requires us to pay for something today but not enjoy it until later. The Wimpy Savings Plan makes increasing your savings rate easier by allowing you to keep your take-home pay at its current level (enjoying your hamburger today) coupled with a commitment to save a significant portion of any future raises (paying for it on Tuesday).
Save More Tomorrow
The real name for the plan is Save More Tomorrow, and it was developed by Richard H. Thaler of the University of Chicago Graduate School of Business, and Shlomo Benartzi of the Anderson School at UCLA. The plan allows employees to commit to increase the percentage of their wages contributed to their retirement plan with each raise they receive. For example, an employee who currently contributes 5 percent to their retirement might commit to increase the contribution either 2 percentage points or the full amount of each raise, whichever is greater. If their next raise is greater than 2 percent their take-home pay will increase, but at the very least their take-home pay will remain the same while their retirement contributions increase. Employees can opt out of the program at any time but if no further action is taken by an employee their retirement contributions will increase automatically with the first paycheck following each raise.
Thaler and Benartzi piloted the program at several companies where they saw great success. In the test companies participants in the plan increased their retirement contributions from an average of 3.5% at the start of the program to 13.6% after 4 years. Thaler attributed the success of the program to human nature, stating “…the plan takes advantage of the fact that for most of us, our self-control intentions about the future exceed our implementations in the present.” In other words, it is easier to commit to pay for our hamburger next Tuesday than today.
The Save More Tomorrow Plan has expanded to many companies since its introduction, and it appears to be gaining momentum, but it is presently available to only a small percentage of employees in the United States. Check and see if it is available where you work. If it is, sign up immediately. If it is not, request that your company make it available. You might even volunteer to help implement it. It is a great way to help employees increase their savings and it is easy and cheap for a company to offer.
If the plan is not available where you work you will have to take action on your own. Write up a simple contract stating how much of your future raises you commit to save. Sign the contract to make it official. Sharing your commitment with others will put some added pressure on you to follow through. Then, as soon as you know about a future raise take action by increasing the amount taken out of your paycheck for retirement savings starting with the first paycheck after the raise. This takes a little more discipline than having your company increase your savings automatically, but you can do it.
Saving is never easy but this is as close as you can get to a painless method of increasing your retirement savings. So go ahead and be a little “wimpy”. Enjoy your hamburgers today, but make a firm commitment to pay for them by saving more tomorrow.