Buzz
As we've previously mentioned, your financial habits are influenced by your mindset. When accessing your funds is more challenging (i.e., they are illiquid), you're less likely to spend them impulsively. This is evident, but according to a study published in the National Bureau of Economic Research, most people are aware of this, and that illiquidity actually inspires saving.
Researchers offered subjects savings accounts with different restrictions, then asked how much they wanted to save in each type of account. They found that the more penalties an account had, the more money people would save in the account. When the account was liquid, meaning the money was easy to withdraw, the subjects didn’t save as much. Researchers write:
Each participant divides money between a liquid account, which permits unrestricted withdrawals, and a commitment account with withdrawal restrictions that are randomized across participants. When the two accounts pay the same interest rate, the most illiquid commitment account attracts more money than any of the other commitment accounts. We show theoretically that this pattern is consistent with the presence of sophisticated present-biased agents, who prefer more illiquid commitment accounts even if they are subject to uninsurable marginal utility shocks drawn from a broad class of distributions.
Basically, the findings show we’re aware we lack self-control, so we safeguard ourselves from overspending by putting more of our cash in hard-to-access accounts.
The Atlantic suggests that stricter penalties for early withdrawals from 401(k) and similar accounts could encourage individuals to save more. However, this is just one study, and it's challenging to determine its accuracy—plus, there is such a thing as oversaving.
Nonetheless, it offers an intriguing perspective on our financial behaviors. It also supports the practice of placing your money in a Certificate of Deposit (CD) or maintaining your savings account at a separate bank from your checking account. The overarching idea is: the more difficult it is to access your funds, the more motivated you'll be to increase your savings.
You can read the complete study at the link below.
Photo by Mizianitka.
