You will be able to explain commitment devices and how Save More Tomorrow uses them.
Ask Darren to save an extra S$100 a month starting this payday and he'll wince: his budget is tight and S$100 feels like a real cut. Ask him instead to commit now to saving half of his next pay rise, whenever it comes, and he agrees in seconds. It's the same S$100 a month, if the rise is S$200. The second version is easier because none of it has to come out of money he already has.
A commitment device is a decision you make now that restricts what you can do later, set up because you know your future self might choose differently. The oldest example is from 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 doesn't trust his future self, so he takes the choice away from him.
Money commitment devices work the same way. A savings account you can't withdraw from without notice, a transfer that happens before you can spend the money, a promise to a friend with something at stake: each one 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 a commitment, the costs are in the future, so the patient version of you is the one deciding. When the moment arrives, the decision has already been made.
Richard Thaler and Shlomo Benartzi designed a programme built on this idea, called Save More Tomorrow, and tested it with employees at companies in the United States in the late 1990s. Employees who said they couldn't afford to save more were asked to commit, in advance, to raising their pension contribution each time they got a pay rise. The increases kept going at each rise until they hit a limit set in advance, and employees could leave the programme at any time.
Most of the people offered the plan joined, and most of them stayed in it. Over several pay rises, their saving rates climbed well above where they had started, and above the rates of colleagues who had taken a one-off recommendation to save more instead. Versions of the programme were later built into many workplace pension plans.
The design takes on three problems at once. Present bias is handled because the commitment is about future money. Loss aversion, from lesson 2.2, is handled because take-home pay never falls: each increase is taken from a rise, so it never feels like a cut. Status quo bias, from lesson 2.4, ends up working for the saver, because once enrolled, staying in is the default.
You don't need an employer's programme to use the idea. Darren's version looks like this, with example figures. He saves S$300 a month now. When his next pay rise arrives, suppose it adds S$200 a month to his take-home pay, he'll raise his transfer by S$100 to S$400 and keep the other S$100. At the rise after that, if it's similar, the transfer goes to S$500. His take-home pay goes up a little at every rise and never goes down. His saving goes up a little more each time.
The commitment needs a trigger and a written amount, otherwise it's just 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. Bonuses work too: "a third of every bonus goes to my buffer before it's spent" can be written months ahead, which fits neatly with the windfall plan from lesson 3.2.
Some commitments lock money away for years. The Supplementary Retirement Scheme 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 can't be withdrawn again until the CPF rules allow, usually much later in life. The current rules, caps and tax treatment change, so check IRAS and the CPF Board before you commit.
Locks like these are strong medicine. They protect money from your impatient self very well, but they also protect it from you when you have a real need. Use them for money you're confident you won't need before the lock ends, and only after you have an emergency buffer and no expensive debt. A commitment you can't keep is worse than a smaller one you can.
Darren isn't ready for a lock yet. He wrote his pay rise commitment on a note in his phone and set a reminder for the month his review is due.
Think about your own next pay rise or bonus, and the share of it you'd be willing to promise to saving today.
Write one commitment you could make now about your next pay rise or bonus.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).