Financial advisers and self-help books tell you that setting long-term goals is an essential step to increasing your savings. But is that really true?
Not according to Utpal “Paul” Dholakia, associate professor of management at Rice University in Houston. His research shows that savers who focus on the here and now succeed in putting away much larger amounts of money than people who set long-term goals. “Investors actually save much less and make riskier financial decisions the further out in the future their savings goal is,” says Dholakia.
In one of his experiments, savers who concentrated on savings goals one month in the future did an average of 14 times better than those concentrating on four-month goals. In fact, some of the short-term savers succeeded in saving $440 a month when their initial goal was only $287.
In sad contrast, those who were looking further ahead said they planned to save an average of $946 over four months, but managed to put away only a miniscule $123. “People don’t behave thoughtfully when it comes to setting long-term goals,” says Dholakia. “They’re driven by habit and they become overly optimistic. They also start relying on bonuses and future raises to meet their target, and very little money ends up being directed to actual savings.”
Dholakia’s advice? If your income fluctuates from month to month, set monthly savings targets at the beginning of each month. If you’re lucky enough to have a steady income all year round, take your annual target for savings (say, $4,200) and break it into a monthly goal — in this case, $350 a month. Then set up an automatic savings plan with your bank that will deduct the $350 from your paycheque every month. “That way, your savings targets always get met.”