Save money, it's easy if you do it automatically: NPR

Summer is here. Would not it be nice to have a vacation fund saved to go to a fantastic place? Of course, but most of us do not do it. In fact, the US Federal Reserve says that 40% of Americans do not even have $ 400 to cover an emergency.

If you are not good at saving, it's not your fault. Our brains are not wired to focus on the future, so you fight against millions of years of evolution. The good news is that there is a simple way to win this fight: Do it automatically.

"The right way to do it is the easiest way to do it," says Brigitte Madrian, a behavioral economist and dean of the Marriott School of Business at Brigham Young University. "The simplest method is to use payroll deductions because the money you never see is the one that you are much less likely to miss."

Madrian says that humans "tend to be overweight in what we feel in the present, our current situation, in relation to what things might be in the future." We are "neglecting the future", giving more importance to the things that lie ahead – meeting friends for a drink, for example, or even doing the dishes – than saving money for something now. found in years, even decades.

But, says Madrian, if we do automatic savings, we will do very well. And there is striking evidence that it really works.

"Much more successful than we thought"

Over the last ten years, the UK government has passed a law requiring employers to enroll the entire workforce in a retirement savings program. Even if you are returning hamburgers at McDonald's, your employer must sign up for an automatic savings plan.

According to Charlotte Clark, Program Director for the UK Government, each of the 1.2 million employers in the UK must participate. She says the program started with employees saving 2% of their salary. During the past year, the program has increased its share to 5%, with the employer giving up part of its budget.

Employees can choose if they wish. So, how many people are able to stick to this savings program? More than 90%, Clark says.

"It was a lot more successful than we thought," says Clark.

It may seem counterintuitive that many people, even those with low incomes, manage to save. Many people live paychecks without much financial leeway.

"But that's also true [for those who don’t save] is that many of those households who live to the limit end up turning to expensive forms of credit when they are hit by financial shocks, "said Madrian.

A car repair is often put on a credit card with a high interest rate. It costs a lot more and is less affordable than learning how to save money before spending it.

In fact, says Clark, low-income people are more likely to stick to the savings program because they like to see these savings accumulate.

"We did not think that if you did it in the general population, you'd end up with that kind of number," says Clark. "In my opinion, the default values ​​are very powerful.

Free money not to be missed

You do not have to live in the UK to use this powerful life hack. "You should definitely participate in your 401 (k)" if your employer offers one, says Madrian, "because you can register once and you can leave it alone."

Studies conducted in the United States by Madrian and other economists have shown that, as in the UK, the vast majority of people save money in a retirement plan once they are registered. In Madrian's study, however, far fewer people subscribed to the same retirement savings plan if they had to do it themselves.

In the United States, some employers are now automatically recruiting workers, as requested by the United Kingdom. This method is particularly effective because it uses two levels of automatic savings: automatic enrollment in the plan and automatic deduction of paychecks.

Madrian says that if your employer offers to match the funds you put in a 401 (k), that 's free money that you do not want to miss. In addition, the salaries you accumulate in retirement accounts, such as 401 (k) plans and IRAs, also reduce the amount of taxes you will have to pay at the end of the year.

Madrian recommends that you increase your savings over several years, even with a minimum of 2 percentage points per year. "In a few years you can get a significant fraction of people who have started saving between 3 and 4% per year up to 10, 11, 12% per year and they have not even noticed it" , she says.

If your employer does not offer a retirement plan, you can create your own account and ask your employer to automatically deposit a portion of each pay check into it, or you can make a recurring automatic payment from from your account. (We have a full episode of the Life Kit on how to create a smart retirement investment account and avoid paying excessive fees.)

Personal finance experts also say that it is a good idea to send money on multiple accounts – one for retirement that you never touch; another for expenses that appear, such as car repairs or a broken washing machine; an education savings fund if you have children; and one to save for holidays or other non-essential entertainment. Experts advise you to find a free account when you save in an emergency, because it can quickly save money.

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