How to save an extra $100 a month – without even thinking about it

Why is saving so hard for so many people?

When Duke University professor Dan Ariely was asked the question in a 2010 CBS interview, he had an answer as simple as it is compelling.

“There are two problems with saving,” he said.

The first is that we tend to focus much more on the present than on the future. That’s why we find it so hard to, say, buy a less expensive car right now so that we can have $5,000 more in retirement. Even though we know, rationally, that we should be squirrelling away money for our 70- and 80-year-old selves, we are hard-wired to do the opposite.

“It’s an inherent part of human nature,” Ariely said.

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The second problem with money is that it’s abstract, Ariely continued. If you ask people to compare apples and oranges, they can do that. If you ask them what an apple is worth to them right now — is it 10 cents, 50 cents, a dollar? — they’re not quite sure. This also makes it difficult for people to envision what they’d be giving up in retirement if they don’t save enough today.

Educating people about the importance of saving only goes so far. But one way to mitigate that problem, according to Ariely, is to automate savings.

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That’s what a number of recent money-saving apps do. Here in Canada, KOHO, which launched in March 2017, rounds up transactions to the nearest $1, $5 or $10 and automatically saves those dollars and cents. For example, if you were to buy a $3.25 latte, KOHO’s RoundUp feature will set aside $0.75, $1.75 or $6.75, depending on how aggressively you want to save.

Users can also automate savings the more old-fashioned way, by setting up regular automated transfers. What’s new in KOHO, though, is that the app not only lets people set a number of savings goals but also shows them a “spendable” balance, which reflects the suggested amount they can spend without missing their savings targets.

“Saving is similar to dieting,” KOHO CEO Daniel Eberhard told Global News. “If you’re surrounded by food all the time, it gets harder and harder.”

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Automated savings, essentially, take the extra food out of your financial fridge, so you don’t have to do the mental lifting of resisting temptation every time you open the door.

On average, KOHO users, which number around 50,000, are saving at a rate of 15 per cent, Eberhard said. That’s remarkably higher than Canada’s household saving rate, which has been hovering at or below five per cent since the late 1990s.

With another app called Thrive Savings, Canadians are setting aside on average $85 a month above and beyond what they were already saving, an amount that CEO Jordan Wimmer expects to eventually grow to around $105.

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Thrive leverages artificial intelligence to put users’ saving on autopilot. The app, which launched in January 2017, is available as an employer-sponsored service, links up to a client’s existing bank account and uses an algorithm to analyze past transactions and identify cash flow patterns for those who choose to automate their savings. There is also a brief onboarding questionnaire, where new users answer questions like whether their job is full- or part-time, Wimmer told Global News. Based on the information, the algorithm sets aside small amounts of money every week that beef up employees’ savings accounts.

“People do not want to be told, ‘hey, you should have less Starbucks,’ or, ‘you should cancel that Netflix subscription.’ The way you get people ahead is you show them that they can save small amounts, and then they want to save more,” Wimmer said.

The algorithm is initially set up to save 50 per cent of the potential savings it spots in a users’ bank account. Employees can ask to reduce that buffer and increase their savings rate if they wish. So far, half of Thrive users have chosen to turbo-charge their automated savings feature after three weeks of using the app, Wimmer said.

Like KOHO, Thrive also allows users to set savings targets, and there’s even an option for employers to match or add a bonus to employees’ contributions to help them reach goals — be it paying for paying for a wedding or extinguishing credit card debt.

Fifteen employers have signed up for Thrive so far, with 45 more companies and organizations in the queue waiting to join, Wimmer said.

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Among the big banks, RBC launched something similar in October 2017. RBC clients can enrol in NOMI Find and Save, which sweeps bank accounts up to three times a week looking for savings.

So far, NOMI users have saved an average of $130 more a month and $1,500 more a year, according to data provided by RBC to Global News.

“Many people are surprised that they can save,” said Vinita Savani vice-president, GICs and Savings at RBC.

But money-saving apps have their limits. For one, the amounts that bots can stash away automatically are necessarily small.

Also, there is no substitute for a proactive monthly spending plan, said Sheila Walkington, a Vancouver-based certified financial planner and co-founder of Money Coaches Canada.

“There is only so much money to go around, so it is important to be very aware of how we want to spend that money. Having clear priorities and a clear plan helps ensure you get to the do the things you want, and also makes it easier to say ‘no’ to the things that aren’t quite as important,” she told Global News via email.

But Savani said NOMI seems to be helping even consummate savers who already had well-oiled budgets and savings plans before adopting the app’s auto-saving feature.

“Some people were saying, ‘How could I possibly save more?'”

But the bot, she said, found a way.