Tim Harford on Smarter Saving

It has always struck me as odd that borrowers regard monthly credit card bills offering a 12.5% APR as “cheap” whereas a long term savings deposit account paying 4% is regarded as derisory and unattractive. When it comes to savings behaviour smart decision-making can often fly straight out of the window.

The Undercover Economist Tim Harford has a super piece on smarter saving and behavioural economics in this edition of Parade magazine.

The article is timely, not just because of the sharp turnaround in household savings behaviour as recession has started to bite, but also given the long term issues of pensioner poverty and the underlying reasons why people tend to save so little for their retirement. The explanations lie in an optimism that things will turn out ok to information failure about the law of compound interest and a neurological preference for current consumption. Tim’s article touches on the work of Richard Thaler whose ‘save for tomorrow’ brand of compulsory saving schemes seems to be in vogue with a cluster of leading politicians.

And his piece is optimistic about the likely savings behaviour of a new generation

“Thanks to the present financial turmoil, today’s teenagers will probably have much less trouble saving when they hit adulthood. They’ll have seen firsthand that saving is not about using your money to invest and make a killing on stocks or real estate; it’s about putting some of your money safely aside in an uncertain world.”

The article can be found here - highly recommended