Best Way to Save: One Day at a Time

Leona Tam is assistant professor of marketing at Old Dominion University, in Norfolk, Va.

What did you find in your research about people's saving habits?

If we ask people how much they think they can save next month, the dollar amount is close to their estimate of what they can save each month for the whole year. But the further out the delay, or the longer the savings period, the harder it is to be accurate. If we ask people how much they think they can save in a specific month in the future, the number will be much higher -- outrageously high. It's wacky. Even wackier is how much people actually save.

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How much?

In one experiment, the people looking ahead one month estimated they'd save $287 but actually saved $440. People estimating for the year guessed $356 per month and actually put away $324.

But the people who were asked how much they'd save in a specific month in the future picked a much higher number -- $946. It didn't matter which month we asked about -- the number was always a lot higher. Yet in the month following their estimate, they'd saved only $248. And when we checked how much they'd saved in the specific future month, it was just $123.

How do you explain the difference?

Whenever there's a delay, people think that things will get better. They think they'll get a pay raise, a promotion or change jobs. We all think we can be better off just a few months from now, and for a while that was true -- think of home prices five years back. Our research shows that people in this situation make more-aggressive, riskier financial decisions.

What happens when they come up short?

That leads to what is known as the "what the hell" effect. People think they can save so much, but when they realize they can't, they figure, "I can't reach my goal. I might as well spend the money." Dieters do the same thing.

So what should people do to save more effectively?

Think short term -- in baby steps. Save paycheck to paycheck, instead of hoping for a windfall. You won't be able to save $6,000 by the end of the year until you save $500 every month. If you're spending more than your paycheck this time, make it up immediately.

And don't think about that ginormous sum you need for retirement. Check your progress just once a year.