Belinda Carbutt, Group Savings Specialist at Allan Gray
As many employees start planning for the year ahead, it is a good time to think about how to make your money work harder, especially if you are expecting a salary increase at year-end.
According to Belinda Carbutt, Group Savings specialist at Allan Gray, leaning on learnings from behavioural science can help us make smarter financial choices that pay off over the long term.
“Saving is hard because this runs counter to how our brains are wired,” says Carbutt. “When we set money aside for the future, it feels like a loss in the present: less cash in our pockets, fewer immediate rewards.”
Behavioural economists describe this as loss aversion, the tendency to feel the pain of a loss far more intensely than the pleasure of a gain. Added to this is present bias, the instinct to prioritise today’s wants over tomorrow’s needs or, put another way, our tendency to prioritise instant gratification rather than future rewards.
How to save more in the future using behavioural science
Based on the work of Nobel Prize-winning economist Richard Thaler and behavioural finance expert Shlomo Benartzi, an innovative strategy has been devised to boost retirement outcomes for investors: The Save More Tomorrow™ (SMT) programme helps investors overcome present bias and loss aversion, as well as inertia, by working with our natural instincts rather than against them. How does it do this?
“SMT sidesteps present bias by encouraging employees to commit today to saving more later, typically timed with their next salary increase,” says Carbutt. “Similarly, by linking contribution increases to pay increases, SMT ensures that take-home pay doesn’t noticeably shrink, reducing the sense of loss.”
She adds that this approach also helps to overcome inertia, our natural tendency to stick with the status quo. By recognising that most people are unlikely to opt out once a system is in place, SMT uses automation to its advantage, turning inertia into a powerful driver of positive savings growth.
From theory to practice – following the glide path
One simple way to put this strategy into play is to ask your employer to increase your retirement fund contributions each time your salary goes up, and to make this a yearly habit.
“If you’re an employee, you can gradually increase your retirement savings contributions over time, using your future salary increases,” she suggests. “For instance, if your monthly contribution to your employer’s retirement fund is 7.5%, you can escalate this amount by 1% per year in line with your salary increase, with a cap at 15%.”
Another option is to automate small annual increases to your investment debit order – for example, by 5% a year. “It’s a good idea to set this up at the inception of your investment, so that you make the commitment upfront rather than having to renegotiate with yourself,” she asserts.
Consistency over sacrifice
Ultimately, she believes building financial security is about consistency. “By committing to gradual increases in your investments, you can transform small changes into meaningful long-term outcomes,” concludes Carbutt.
ENDS
