Benefits Now!

We humans kind of suck at evaluating things that impact us far off in the future: retirement, our long term health, impacts to the environment, stuff like that.

If starting a small habit today will have big benefits to us decades from now, but is still minorly inconvenient, say, putting one additional percent of our salary into a 401k this month as Paula Pant suggests, we often will choose to indefinitely delay the inconvenience.

After all, we could die tomorrow. Who wants to be the sucker who denied himself a series of small benefits today for a tomorrow that never comes? Yolo, mofo.

We nerds who have come to love personal finance have also probably discovered some trick or tip that allows us to suffer small sacrifices today in pursuit of a long term goal. Over time, we manage to accumulate emergency funds, down payments for houses, and healthy retirement accounts that maybe even allow us to reach financial independence at a crazy early age.

But we are a minority in a society that lives for today. The average retirement savings of our fellow citizens are tragically, comically low, across all age groups. A majority of Americans would be put into debt by a single $500 emergency. Despite it being fairly common knowledge that saving early and often for long term goals like retirement allows compound interest to do the heavy lifting, most of us aren't taking the requisite steps. Because, reasons.

And behavioral economics posits that we aren't great at acting rationally, especially when it comes to long term decisions, like our health. Luckily for us, there are ways we can trick our monkey brains.

Take something like smoking, which is commonly known to be bad for you, but those serious consequences are years or decades from realization. Might there be a program that can flip the script?

Penn researchers Halpern, French, et al ran an experiment with CVS employees, offering two different programs to smokers to encourage them to quit. One, if the employee opted in, asked him to deposit $150 into an account and, if he managed to quit, earned a $650 reward along with getting the $150 deposit back. But if he failed to quit, he would lose the $150.

A second program simply offered an $800 reward for successfully quitting: all carrot, no stick.

The results for both are encouraging for behavior modification: both options had better smoking cessation rates than normal care ("involving information and, for participants enrolled in the CVS Caremark health care plan, free smoking-cessation aids"). But while many fewer employees opted to risk their own $150, those who did saw better results than those simply offered a (larger) $800 reward.

It seems having some skin in the game improves results. This is loss aversion at work. We feel losses more accutely than we do comparable gains.

But the takeaway that is most interesting to me is how these experiments used relatively small-but-immediate incentives to motivate smokers. Should losing $150, or gaining $650, be more motivational than, say, avoiding cancer or living an additional decade?

Of course not. But we are not so smart. So implementing carrots and sticks that apply in the present can trick our irrational minds into doing what we ought to do.

This experiment showed how a company can use personal finance (a small financial gain or loss) to have an impact on its employees' health. But there are ways that these principles can be applied to improve our finances, too.

For example, one of the main benefits of a 401k is deferring taxes now, with the caveat that you will owe taxes later, often with the employer matching funds in the same year. However, employers and HR departments typically do a poor job of highlighting these immediate benefits, instead focusing on account balances decades in the future.

Instead, employers could explain in better detail how putting $100 in a 401k will net you an extra $100 in matching funds today, in addition to avoiding taxes equal to your marginal tax rate.

This highlights another missed opportunity for employee 401k plans: HR departments should integrate their W4 systems, and provide calculators, to properly adjust employee withholding each time an additional contribution is made.

That way, employees can not only see the immediate tax benefits of their 401k deposits, but can get them back in their paychecks immediately, rather than waiting for a too-large tax refund next April. Brokerages like Vanguard and Fidelity could provide similar tools and reminders to adjust W4 forms when deposits to Traditional IRAs are made, or better yet, when investors are considering whether to use a Roth or Traditional IRA in the first place.

Other benefits might be helpful, too: like having orgasms every time you make a contribution to a Vanguard account. Having sex with your significant other or a beautiful stranger when you make an extra deposit to your retirement account is not only good for your finances, it also feels pretty good. (If any employees of Vanguard are reading this, I have found your app is not particularly helpful for this, as it neither has an option to remind yourself to have sex as a reward for saving for retirement, or any suggestions for mixing things up in the bedroom. Maybe you can address this gap in a future release.)

No matter how you do it, be sure to find a way to reward yourself in the moment when you make a good decision. Don't let far off goals be supported by far-off benefits alone.


*Photo is from Zaprittsky at Flickr Creative Commons.