AUDIE CORNISH, HOST:
So it's nearly February. How are you doing with those New Year's resolutions? Did you make one to save more money? Well, NPR's Chris Arnold might be able to help. He covers personal finance for Life Kit, NPR's collection of audio guides on how to live a better life, including one powerful thing you can do to save more money.
CHRIS ARNOLD, BYLINE: We are going to start in caveman times. All right, you are a cave man - just go with me here - or a cave woman. And you're super hairy, and you're, like, roaming the savannah. You're fighting for your life every day. There's wolves and saber-toothed tigers, and they're creeping up behind you all the time. It's like, whoa.
(SOUNDBITE OF JUNGLE CAT GROWLING)
ARNOLD: Now, is this the best time to be thinking about saving and your 401(k) retirement account? I mean, no, of course not. Cave men don't think about that stuff. You need to survive the day and eat food and don't get eaten yourself. And OK, we're being stupid and corny here. But this is in fact a good lesson about saving money because the point is that we are hardwired to focus on the present and immediate gratification. And it's been that way for a very long time. And this is, like, the opposite of what your brain has to do to focus on saving money.
BRIGITTE MADRIAN: We tend to overweight how we feel in the present - our current situation - relative to what things can be like in the future.
ARNOLD: That's Brigitte Madrian. She's a behavioral economist at Brigham Young University.
MADRIAN: I study all of the ways that households make mistakes in managing their money and how to improve financial outcomes for consumers.
ARNOLD: And Madrian says when it comes to saving for the future, there is one thing that research has proven to work really well. You have to make it automatic.
MADRIAN: The right way to do it is the easy way to do it. And the easy way to do it is through payroll deduction because the money you never see is the money that you're much less likely to miss. So if your employer is offering a retirement savings plan such as a 401(k), you should absolutely be participating in your 401(k) because you can sign up once, and then you can just leave it alone.
ARNOLD: And if an employer plan is not an option, Madrian says you can still set up a retirement investment account yourself and get money from every paycheck or from your bank account every two weeks auto-deposited into it. Now, a lot of people will say that, look; I can't afford to save money like that. I mean, I'm - I don't make that much money. And these days it's true that many people are living paycheck to paycheck, and finances are really tight.
MADRIAN: But what's also true is that many of those households that are living on the edge end up having to turn to expensive forms of credit when they get hit by financial shocks.
ARNOLD: But here's the really amazing thing. Using this automatic approach to saving, many people can save much more money than they think they can.
MADRIAN: Yeah, and there have been studies that have shown that, you know, if people increase their contribution rate by, you know, a couple of percentage points a year, within a few years, you can get a large fraction of people, you know, who started out saving 3 or 4 percent a year up to 10, 11, 12 percent a year, and they haven't even noticed it.
ARNOLD: And there's some pretty astounding evidence now that this works no matter how much money you make. The U.K. recently implemented a new law, and it says that the entire working population of the country - the entire country has to be enrolled in a retirement savings plan. So that means from people who flip burgers at McDonald's up to, like, big-deal company executives - you get enrolled in an automatic savings plan, and all companies have to do it.
CHARLOTTE CLARK: There are 1.2 million employers in the U.K. - every single one of them.
ARNOLD: Charlotte Clark is the U.K. government official in charge of implementing the savings program. She says they started off with people saving 2 percent of their salary. They just bumped it up to 5 percent, the employer is kicking in part of that. People can opt out if they want to.
And how is it working? I mean, how many people are sticking with it and deciding that they can afford to save for the future?
CLARK: So it's been much more successful than we thought. I - so over 90 percent of people stick with it.
ARNOLD: Ninety percent of people hang in there and keep saving because it's automatic.
CLARK: And we didn't think if you did it across the whole of the population you'd end up with that sort of number. My view is defaults are really powerful.
ARNOLD: Defaults are really powerful, meaning if you can take that first step and get money automatically going into a retirement account, the odds are overwhelming that you're going to be able to save a lot more money going forward. Chris Arnold, NPR News.
CORNISH: Like Kit is NPR's new family of audio guides for navigating your life, everything from finances to diet and exercise to raising kids. Check out Life Kit guides wherever you get podcasts or at npr.org/lifekit.