The Secret to Saving for a Rainy Day

To convince yourself to spend less now, you might want to think hard about your future self.

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How connected do you feel to your future self? It might seem like a strange question, but the answer determines how likely you are to blow your money today or save it for later. A new report from the Columbia Business School and University of Chicago Booth School of Business reveals that consumers make money choices based on how connected they feel to their future identities—and that it’s relatively easy to manipulate those feelings.

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Remember the famous marshmallow experiment, where Stanford researchers offered children one marshmallow now, or two marshmallows later? The children that opted for two treats later were more likely to be successful in life, suggesting that the ability to defer gratification is a valuable trait to have. This new report, published in the June 2011 edition of the Journal of Consumer Research, expands those findings to explain what causes some people to defer gratification and others to gobble up their marshmallows—or spend their money—as soon as possible.

The two researchers, professors Daniel Bartels of Columbia and Oleg Urminsky of Booth, asked graduating seniors at a Midwest university to read one of two statements: The first emphasized how big of a deal it was to graduate and how much they would change afterward. The second one did just the reverse, emphasizing that one’s core identity changes very little throughout the course of one’s life. Then participants were told they could receive a gift card right away, or a bigger gift card later.

The results were clear: Students who read the statement emphasizing continuity in one’s identity were more likely to elect to receive the larger gift card (worth up to $240) later; those who read the statement focused on change were more likely to opt for the lower-valued gift card (worth $120) immediately.

In other words, people seem to be very easily manipulated into feeling either more or less connected with their future identities, which in turn influences whether they delay gratification or not. It’s easy to imagine that flexibility being used for nefarious purposes: Companies could get you to spend more if advertisements convinced you to first feel less connected to your future self, for example. But these findings also have extremely useful implications for anyone who wants to save more for a rainy day (or retirement), stop spending so much, or just practice more self-discipline.

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To convince yourself to delay gratification to achieve any of those goals, the researchers have a relatively simple solution: Take a moment or two to meditate on your future self, and just how similar it is to your current self. As the researchers put it, “[S]imply…maintaining a sense of connectedness to the future self may help resolve these dilemmas, yielding more farsighted choices. Rather than employing guilt or complex incentive schemes pitting the interests of future and current selves against each other, simply fostering the sense that what matters most in defining us persists over time may represent a powerful means to help us persist in achieving important goals.”

That kind of future-focused thinking might be especially important during major life events, such as college graduation, marriage, and divorce, when people are particularly vulnerable to feeling disconnected to their future selves.

Some consumers, however, have the opposite problem. They are so good as saving for a rainy day that they forget to enjoy the current one. Ran Kivetz, a business professor at Columbia University, has identified the concept of "self-control regrets," which describes what people feel if they deny themselves some indulgence that they later wish they had sampled. "People feel guilty about luxuries and it's hard to justify them, so they under-consume them," he explains.

Over time, Kivetz says, guilt over indulgences tends to dissipate, while feelings of "missing out" on a pleasurable experience or purchase remain. That explains why, five years after deciding against taking a wine-soaked cruise to Italy, for example, one might wish he had gone.

So what is the "right" amount of indulgence? How do we know if we are truly being smart by avoiding a purchase, versus inflicting unnecessary guilt upon ourselves? Kivetz says there's no easy answer, and that not surprisingly, it depends entirely on the individual. In other words, each person has to decide for himself. Kivetz recommends making decisions with the long term in mind. Ask yourself, "How will I feel about this many years down the road? Will I wish I had made the purchase?"

In other words, the solution is the same whether you are prone to over-spending or under-spending: Take a moment to think about your future self. One day, you’ll thank yourself for it.

Kimberly Palmer (@alphaconsumer) is the author of the book Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back.