Saving for a Rainy Day in a Boom Economy: 5 Methods That Work for Client Advice

Most financial behaviorists discuss deferred gratification by the famous marshmallow test. That test measured whether the kids could forgo the pleasure of one marshmallow for more pleasure later. But there is a major flaw in using the marshmallow test (and the idea behind it) to help clients save for a rainy day

Finally, it seems like your clients can exhale a little. After years of stagnant wages and industry shake ups, it seems like the economy has leveled a little. It’s as if the white water river your clients have been navigating has settled and they can pose for selfies as they float down easy river. So how do you get those clients to be ready for the next round of rapids? It’s all about habits.

Humans are notoriously bad about deferred gratification. That’s the behavior that puts off an instant reward, like spending on a luxurious dinner, for a later reward, like paying for groceries when you are unemployed. While some may point to the fact that our human nature is to avoid pain and extend pleasure (see, anything Buddha said), it can be a little more complicated than that.

Most financial behaviorists discuss deferred gratification via the famous (or maybe infamous) marshmallow test. That test promised children they could have one marshmallow now but if they waited for 20 minutes, they could have two, marshmallows later. In other words, they tested whether the kids could forgo the pleasure of the instant marshmallow for more pleasure/marshmallows later. The results alleged that the kids who picked the later marshmallows did better in everything in life (lower body mass index, better SAT scores, etc.).  But there is a major flaw in using the marshmallow test (and the idea behind it) to help clients save for a rainy day.

As the original author of the marshmallow test explained: “People experience willpower fatigue and plain old fatigue and exhaustion. What we do when we get tired is heavily influenced by the self-standards we develop and that in turn is strongly influenced by the models we have.” In other words, your environment and the length of time you’ve been forgoing gratification, have an impact on your ability to keep doing it. And, habits are potentially more important on saving than we might have thought.  This means the first method to help your clients save for a rainy day, even when things seem sunny, is to stop thinking that the delayed gratification model can work in perpetuity.

When it comes to habits, the old saying “We are what we repeatedly do” should be the focus. If your clients have a good habit, like moving 6% of their salary into retirement funds to capture a match from their employer, most likely they will stick that good habit, even if things change, like if they change to an employer who doesn’t match (all other things being equal). The focus for investment advisors concerned about their clients having decision fatigue or a willpower crisis, may be to lighten the load of the saving so it feels less like delaying and more like a habit.

How can you help clients develop good saving habits in a good economy? The key is to have them identify the good, or positive feeling, behind the habit. For example, instead of tying the saving to being “retirement ready” the habit of saving could be tied to “feeling prepared” or “feeling like I’m protecting my family.” Then, each month that a client saves, they are feeling a positive (protecting my family) instead of reaching for a goal that is far away (retirement ready).  One behaviorist suggested focusing on whether the habit will improve the quality of the client’s life.

Another way to help clients develop good savings habits is to help them identify what can be changed from what can’t. On a basic level, traffic, the economy, your mother in law, the weather and other things are out of your control. For a client to tie their retirement savings to making their in-laws feel like they are a better husband will most likely lead to your client failing in this goal.  The in-laws disapproval is out of their control, just like whether it rains or not is out of their control. However, changing the habit of saving – for example, learning to put aside some of bonus compensation or unexpected sources of income (a higher tax return than planned) before splurging on something enjoyable is something that is within your client’s control. The good habit of being grateful about having extra by setting some aside can help your client continue to do so.

Finally, go slowly. Have your clients focus on one habit at a time. Having one retirement account that is regularly funded is an excellent start. But a client who starts with retirement accounts, and also dives into life insurance premiums and annuities and side investments all in the same month may be setting themselves up for failure.  A savings spree, like a shopping spree, will peter out over time. Habits, on the other hand, take time to become ingrained. As an advisor, having a client track their habit and motivating them to stay with it needs to happen one habit at a time.

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