A behavioural barrier to successful saving

Behavioural economists, psychologists and financial planners have long pondered why so many people drag their feet when it comes to saving more - even when they know it is in their best interests.

Procrastination is undoubtedly one of the biggest barriers to successful savings and investing.

It is critical for individuals to understand why investment/savings decisions are postponed and to think about what can be done to overcome this problem.

Writing in the online investment newsletter Cuffelinks, Sydney investment consultant David Bell points to a range of research papers dealing with these issues.

In his article - It's a new year: let's save more, not procrastinate - Bell highlights a few of the main reasons, as shown in the research, for dallying when it comes to saving more:

An "extremely short-term" focus with would-be investors concentrating on their current enjoyment as opposed to putting money aside for the future.

A tendency to delay making what may seem to be complex financial decisions. Bell notes that people fear making the wrong decision, may hesitate about committing to the work required to make an informed decision, and/or may not know where to begin.

Inertia and feeling "comfortable or trapped" in existing financial arrangements.

"Although not all households are in a position to save more, many are and probably should save more if they wish to avoid a deteriorating lifestyle when retirement comes," Bell emphasises.

As an example of a way to address saving/investment procrastination, he discusses an overseas program that involves retirement fund members agreeing to direct a proportion of their future pay rises into bigger regular contributions.

Significantly, this successful savings program doesn't involve participants reducing their current standards of living in order to save more. And most participants tend to stay with the program, perhaps partly through inertia.

One of the attributes of Australia's superannuation system is that it is relatively easy to make arrangements with employers to voluntarily increase the amount being salary-sacrificed into super each year as concessional (pre-tax) contributions within the contribution caps.

The earlier that investors overcome investment/savings procrastination or inertia, the higher their potential rewards over the long-term - including from what has been called the "magic of compounding".

By reinvesting their dividends or interest, an investor effectively earns income on income as well as on their original capital as compounding works its magic. For instance, super fund members are among major beneficiaries of compounding - particularly in the accumulation or savings phase.

And by making an early start to saving more, investors are less likely to have to make a last-minute dash to save as much as possible in the final years of their working lives.

Written by Robin Bowerman, Principal, Market Strategy and Communications at Vanguard Australia.