You will be able to explain what a commitment device is and how Save More Tomorrow uses one.
Darren is a saver with a tight budget. Asked to save an extra S$100 a month starting this payday, he winces, because it feels like a real cut. Asked instead to commit now to saving half of his next pay rise, he agrees in seconds, though that is the same S$100 if the rise is S$200 (an example figure).
Committing future money to saving is easier than cutting current spending because nothing comes out of money you already have, and you can use that on purpose.
A commitment device is a decision you make now that restricts what you can do later. You set it up because you expect your future self might choose differently.
The oldest example is in Homer's Odyssey. Ulysses has his crew tie him to the mast so he can hear the Sirens' song without steering the ship onto the rocks. He does not trust his future self, so he removes the choice.
Money commitment devices work the same way: a savings account you cannot withdraw from without notice, a transfer that happens before you can spend the money, or a promise to a friend with something at stake. Each makes the impatient choice harder to take when the moment comes.
They work because of present bias, from Lesson 5.1. When you set up the commitment, the costs are in the future, so the patient part of you does the deciding. When the moment arrives, the decision is already made.
Save More Tomorrow was designed by Richard Thaler and Shlomo Benartzi and tested with employees at companies in the United States in the late 1990s. Employees who said they could not afford to save more were asked to commit in advance to raising their pension contribution at each pay rise. The increases continued at each rise until they reached a limit set in advance, and employees could leave the programme at any time.
Most people offered the plan joined, and most stayed in it. Over several pay rises their saving rates climbed well above their starting rates, and above those of colleagues who took a one-off recommendation to save more instead. Versions of the programme were later built into many workplace pension plans.
The design handles three problems at once:
Present bias: the commitment is about future money. Loss aversion (Lesson 2.2): each increase comes from a rise, so take-home pay never falls and the saving never feels like a cut. Status quo bias (Lesson 2.4): once someone is enrolled, staying in is the default, so the bias works for the saver.
You do not need an employer programme to use the idea. You do need a trigger and a written amount; without them you have only an intention. "Half of any rise, added to my payday transfer within a week of the first new payslip" is a commitment. "I'll save more when I earn more" is a wish.
Darren saves S$300 a month now. His next pay rise is assumed to add S$200 a month to his take-home pay. At that rise he raises his transfer by S$100 to S$400 and keeps the other S$100. At the following similar rise, the transfer goes to S$500. His take-home pay rises a little each time and never falls, while his saving rises a little more each time.
To set up your own, decide what share of your next rise you will commit to saving and write the amount or share down. Pick a specific trigger, such as within a week of the first new payslip. At the trigger, increase your payday transfer by that amount and keep the rest of the rise. Repeat at each rise after that, and set a reminder. Darren wrote his commitment on a note in his phone and set a reminder for the month his review is due.
Bonuses can be committed too. "A third of every bonus goes to my buffer before it's spent" can be written months ahead, and it fits with the windfall plan in Lesson 3.2.
Stronger locks can tie money up for years. The Supplementary Retirement Scheme (SRS) lets you put money aside for retirement with tax benefits, but withdrawals before the statutory retirement age are generally penalised and taxed. Voluntary cash top-ups to CPF generally cannot be withdrawn until CPF rules allow, usually much later in life. Rules, caps and tax treatment change, so check IRAS and the CPF Board before you commit.
These locks are strong medicine. They protect money from your impatient self, and also from you when you have a real need. Use them only for money you are confident you won't need before the lock ends, and only once you have an emergency buffer and no expensive debt. A commitment you cannot keep is worse than a smaller one you can, and Darren is not ready for a lock yet.
Think about your own next pay rise or bonus, and the share of it you'd be willing to promise to saving today.
Write down one commitment you could make today about your next pay rise or bonus.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).