🌻A Dead Simple Way to Save Money That Most People IgnoreHow simple reminders can help you save more money and avoid piling on debt

Intertemporal choice is a fancy term economists use to describe the fact that we must consider the present and the future when making financial decisions.

If I handed you $100, you’d have to decide whether to spend that money today or save it so you can buy more stuff in the future. That sounds simple, but balancing your needs and wants with your future financial health is hard today.

One reason people struggle to save is present bias, which is the tendency to choose immediate rewards and avoid immediate costs even if you know those decisions are not in your best interest in the long run.

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In this article, I review research that provides another explanation of why people struggle to balance their current and future financial goals: our inability to maintain focus on long-term plans.

Read to the end to learn how simple reminders can help you save more and resist racking up credit card debt.

Why you struggle with “lumpy” expenses

A 2010 paper titled “Getting to the Top of Mind: How Reminders Increase Saving” suggests there are two types of expenses in life:

Regular spending — like rent and groceries
Lumpy spending — which will occur, but when and how much you pay changes.
An example of lumpy would be knowing that you’re traveling to Europe for your best friend’s wedding in six months. The rational way to finance this trip would be to spend less than you ordinarily would over the next six months and put money aside to fund the trip.

However, as the researchers point out, most people do a lousy job planning for these “lumpy” future expenses. So, you don’t pay the future cost of the wedding much attention and continue spending as you normally would.

Then, the day comes when you need to book your flights and hotel. Since you haven’t been saving for the trip, you are left with two crappy options:

Don’t go on the trip
Put the cost of the trip on your credit card
Not all of these lumpy expenditures are as dramatic as paying for a destination wedding. Many lumpy purchases are pretty small, like seeing your favorite musician in concert or buying your spouse an anniversary gift.

But as pointed out in the paper, failing to plan for these frequent lumpy purchases adds up and can have a huge impact over a lifetime.

The power of simple reminders in shaping today’s choice to spend or save

The problem with lumpy expenses like the European wedding is that we have so much going on in our day-to-day lives that it becomes easy to push these future problems to the back of our minds. Then by the time, it becomes an immediate problem — it’s too late to do anything about it.

But what if you received a text message every two weeks reminding you that you need to start saving for this trip?

The research shows that you’d be more likely to spend less today and put money aside to pay for the trip. Economists would say reminders help you balance your intertemporal choices. Simply put, a reminder of the cost of your upcoming trip encourages you to consider this future expense a problem that needs your attention today.

The researchers found that reminders to save are most effective when they are connected to a specific future event. The idea is to give future expenses the same attention as what you buy today.

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For some future expenses — like retirement — it might be more beneficial to automate the savings process and put it out of your mind.

But for those lumpy future costs — whether it be a destination wedding or buying concert tickets — periodic reminders tied to a specific future event can be an effective way to ensure you have enough cash to buy what you want today and in the future.

Contributed by Ben Le Fort

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