A Case for “Impulse Saving.”

Behavioral Finance
Sarah F. Roach, Vice President

I recently listened to an enter­taining talk about saving by Rory Sutherland, vice chairman of international advertising at public relations firm Ogilvy and Mather.  Very much tongue-in-cheek, he first told his audience that as an ad man, he would typically view saving money as “consumerism needlessly delayed.”  After the laughter subsided, however, he went on to ask a serious question:  How do we make saving as easy as spending?  “It’s all about the interface,” said Mr. Sutherland.  In other words, the retail world makes it very easy for people to buy on impulse, but savings advocates haven’t created mechanisms to save impul­sively.  Could we find ways to offer people the equiv­alent of a savings “candy bar,” so they could as easily “buy” a dollar of savings as buy a dollar’s worth of chocolate or tabloid gossip at the checkout counter?

Impulse spending gets some people into trouble, because it’s effortless and seems so inconsequential.  After all, a $3.65 Grande Latte from Starbucks won’t make a noticeable dent in most budgets. But if impulse-spender Sally bought a latte every work day for a year, she would spend about $950 plus sales tax.  Invested for a year at 7%, that amount could have grown to around $1,065.  Compounded at a 7% annual rate of return over a 40-year work career (hopefully, a conservative rate), Sally could have amassed about $200,000!

Just as impulse spending seems harmless, similar amounts put into savings may seem too small to make a difference.  But small amounts add up, and funds saved earlier in life can matter as much or more than larger amounts invested later, as we’ve discussed in other articles.  Moreover, if Sally were to make savings a priority at even modest levels, she would be more likely to get into a savings mindset.  Somewhat facetiously, Mr. Sutherland suggested that if we could press a big red button on our wall to transfer, say, $5.00 from checking into savings, we’d probably push that button fairly often—simply because it was so easy to do impulsively.

We’re starting to see virtual red buttons appear in the high-tech realm.  A few banks in the U.K. and New Zealand have put a red button on their mobile banking websites to encourage and facilitate impulse saving.  In addition, smartphone apps have been developed to help people easily track their impulse and optional spending—with the goal of demon­strating that outflows can add up surprisingly quickly.  And then there’s always the old-fashioned technique of simply writing down every impulse purchase and making a commitment to yourself to regularly save a like amount.

We don’t want to endorse any particular savings tool, but we’re dedicated to education that moves people in the direction of saving more.  Therefore, we’re glad to learn that new ideas are appearing to help make this happen.  This is especially true of techniques aimed at people early in their working lives; young adults who haven’t yet learned—or fully internalized—the miracle of compound growth and the value of saving throughout life.