You will be able to explain why defaults have such a strong effect on how much people save.
Find your most recent payslip and look for the CPF deduction. That amount is taken out of your pay before the rest lands in your bank account. You never see it in your balance, and nobody asks whether you want to put it aside.
Suppose your employer paid you the whole amount instead and left you to send the CPF share across yourself each month. Most people who picture this admit they would not manage it every single month, and you probably would not either. The money in CPF gets saved because no one has to make a decision to save it.
Whatever happens when you take no action is called the default, and every money product comes with one. Leave a subscription alone and it either renews or lapses. Dividends go either into your account as cash or back into the investment. Savings sit in a basic account until you shift them somewhere else. A free trial turns into a paid plan unless you cancel before it ends.
People tend to leave defaults in place, most of the time, even where a change would take a few minutes and save them money. Three forces are at work. One is status quo bias from lesson 2.4, a preference for keeping things the way they are. Another is present bias, covered in lesson 5.1: switching a default asks for a small effort now and pays off later, so it gets pushed back again and again. The last is not being sure which option is best. Put these together and the first arrangement someone sets up usually stays in place.
In the US, many companies used to require employees to sign up before they could join the workplace pension plan. Some firms changed this so that staff were enrolled automatically and could opt out if they wished, and far more employees ended up saving after the change. Many of those enrolled automatically also kept the contribution rate and the fund that the plan had picked for them, even years later. Employees had exactly the same options before and after; the default was the only thing that moved.
Richard Thaler and the legal scholar Cass Sunstein built on these findings in their book Nudge, published in 2008. They argued that anyone who designs a choice has to set some default whether they mean to or not, so it should be one that helps people. Employers and governments in many countries have taken up the idea since then.
CPF is stronger than a default, since contributions are compulsory and employees have no way to opt out. Some of its success still comes from the same source as any well-chosen default. The money is moved before it reaches you, which means you never need to decide to save it and are never given the chance to decide against it.
The saving you can count on is the saving that happens before your pay is in your hands. If you save what remains at the end of the month, two things must go right: something has to be left over, and you have to choose, every month, to move it. Darren relied on that approach in lesson 5.1, and it cost him seven months.
CPF's rules are fixed, but every other default is yours to set. The easiest one is a payday transfer, a standing instruction or GIRO arrangement that sends a fixed sum from your salary account into a savings account on the day after your pay comes in. For investing, a regular savings plan with a bank or broker works the same way. If your platform offers dividend reinvestment, switching it on means dividends stay invested until you choose to take them out.
Some defaults run the other way and cost you. The common ones are:
subscriptions and memberships that renew on their own insurance policies that renew at a higher premium with nobody looking at the new price a card saved as the default payment method in every app
With each of these, the same decision is made on your behalf over and over until you change the setting.
Hui Min, whom you met in lesson 2.4, wrote out her money defaults and gave each a rating. Her CPF contributions were helping. So was the S$500 she sends to her buffer account on the 26th of each month (both example figures), and so was her regular savings plan into an ETF. Her old unit trust from lesson 2.4 reinvests automatically, which helps in one sense, though she is reviewing the fund itself. Three streaming subscriptions she hardly uses were all set to auto-renew, and she marked them as hurting. Her travel insurance renews every year whether or not she travels, so she rated it as probably hurting. Her credit card was saved as the default in five shopping and delivery apps, which she counted as hurting given what lesson 4.1 showed.
When she read the list back, each helpful default turned out to be one she had set up deliberately at some point. Most of the unhelpful ones had been set by someone else, such as a seller or an app, and she had never gone back to change them.
Begin with a full list of the money defaults in your life. Work through CPF, payday transfers, regular savings plans, dividend settings, auto-renewals, insurance renewals and payment cards saved in apps, and mark each as helping or hurting.
For the helping side, add anything missing: a payday transfer dated for the day after payday, a regular savings plan with a broker or bank, and dividend reinvestment if your platform supports it.
For the hurting side, track each item down and change it. Cancel or review subscriptions and memberships on auto-renewal, find out what your insurance will cost before the renewal date, and take saved cards off as the default payment in your apps.
Write down every money default in your own life, from CPF to payday transfers to auto-renewals, and decide for each one whether it's working for you or against you.
List the money defaults in your life, such as CPF, payday transfers and auto-renewals. Mark each one as helping you or hurting you.
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