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Financial literacy · a life skill

Deliberate Savings Automation

pay it from money you haven't had yet

Once a payday transfer is running, the hard part is raising it. Saving more today means less to spend today, and that feels like a pay cut. The way round it is to decide now, for a raise that hasn't arrived: each time your pay goes up, part of the rise goes to savings. Your take-home still climbs, just a little more slowly, and your savings rate climbs with it.

  • Moderate
  • High impact
  • Learn it: 2-4 weeks
  • One rule, used at each raise
four groups, the same four raises
Share of pay saved before and after four pay raises, at one company that offered a step-up plan Those who joined the step-up plan went from saving 3.5% of pay to 13.6%. The company as a whole went from 4.4% to 10.6%. Those who didn't meet the adviser went from 6.6% to 6.2%, and those who turned down both offers from 6.1% to 5.9%. SHARE OF PAY SAVED · BEFORE → AFTER FOUR RAISES Joined the step-up plan 162 people 3.5% 13.6% Everyone at the company 315 people 4.4% 10.6% Didn't meet the adviser 29 people 6.2% 6.6% Turned down both offers 45 people 5.9% 6.1% 0% 5% 10% 15% before the first raise after the fourth, 40 months on

Thaler & Benartzi (2004), one US manufacturer. Joiners chose to join, so the groups weren't alike to begin with.

The method

Decide now, for the next raise.

  1. Write down your rate

    What you save each month as a share of pay, not as an amount. £150 out of £2,500 is 6%. A rate keeps its meaning when your pay changes; an amount doesn't.

  2. Choose the step before the raise

    Decide today how many points each future raise will add: one, two, three. It's far easier to give away money you don't have yet than money already in your account.

  3. Keep the step inside the raise

    If the step takes more than the raise gives, your take-home falls and the plan starts to feel like a cut. Keep it small enough that each payslip after a raise is still bigger than the last.

  4. Set a ceiling

    Pick the rate where it stops: 10%, 15%, whatever your goals need. After that, raises are yours to spend.

  5. Change it the day the raise lands

    Diary the month your pay usually goes up. When the bigger payslip arrives, raise the transfer, or the pension rate, that same day. If your workplace pension can step up by itself, switch that on instead.

    Know your rate, pick the step, keep it inside the raise, set a ceiling, act on raise day.

Example: Priya earns £32,000 and saves 4%, about £107 a month. Their pay usually rises about 4% each April. They set a rule: two more points at each raise, up to 12%. Four Aprils later they're saving about £374 a month, and their take-home has still gone up every year, from £2,560 to about £2,745 before tax.

The raise ladder

Plan five raises ahead.

1 · Where you are

2 · Your raises

3 · Your rule

The figures are before tax. They show the direction your pay and savings move, not your exact payslip.

4 · The ladder

After five raises

Your numbers are kept only in this browser. Nothing is sent anywhere.

The research behind it

Most said yes to later.

Richard Thaler and Shlomo Benartzi designed a plan called Save More Tomorrow for people who said they should save more but didn't. A financial adviser met each employee at one US manufacturer and suggested a higher saving rate. Those who wouldn't raise it now were offered the alternative: no change today, three more points of pay at each future raise, until they asked to stop.

Of the 207 people who turned down the immediate increase, 162 joined the step-up plan, 78%. Asked to save more now, most said no. Asked to save more from a raise they hadn't had yet, most said yes.

Who took which offer: 315 employees; 286 met the adviser; of those, 79 raised their rate straight away, 162 joined the step-up plan and 45 turned down both. WHO TOOK WHICH OFFER, IN PEOPLE Everyone eligible 315 Met the adviser 286 Raised their rate now 79 Joined the step-up plan 162 Turned down both 45 the 286, three ways
Thaler & Benartzi (2004). The 29 who never met the adviser stayed on their old rates.

Most of them stayed. By the fourth raise, three and a half years in, 130 of the 162 were still in the plan, and the joiners' average saving rate had gone from 3.5% to 13.6%. The people who turned both offers down ended slightly lower than they began.

Read it with care. This was one company, and people chose whether to join, so the joiners may have differed from the rest in ways the numbers can't see. The US Department of Labor's evidence review rates the study's causal evidence as low. What it shows clearly is the shape: a plan that never cut anyone's take-home was one most people kept.

People still in the step-up plan at each raise: 162 at the first, 159 at the second, 136 at the third and 130 at the fourth. STILL IN THE STEP-UP PLAN, OF 162 At the first raise 162 · 100% At the second raise 159 · 98% At the third raise 136 · 84% At the fourth raise 130 · 80% 0 50 100 150
Thaler & Benartzi (2004). Most who left did so between the second and third raises.

The idea

Why it works.

The plan was built around three habits of mind. We're more generous with our future selves than with ourselves today, so a promise about next year's raise is easy to make. We feel a cut in take-home far more than a smaller rise, so the step stays inside the raise. And once something is set up, we tend to leave it, so the higher rate keeps running without another decision.

Each of those habits usually works against saving. The ladder turns all three in its favour.

When it goes wrong

Habits that help.

  • Skip a step, don't quit. A tight year is a reason to hold the rate where it is, not to drop back to the start.
  • No raise, no step. The rule only moves when your pay does. A year without a rise is a year at the same rate.
  • Treat a bonus the same way. Decide now what share of any windfall goes to savings, before it arrives.
  • Check the ceiling once a year. If your goals have grown, raise it. If you're there, enjoy the raises.

Go deeper

Keep going.

Resources

Keep this going in the app.

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