Ed McKnight: Science-backed saving tips

Struggling to save money? Ed McKnight has a few tips that are backed by science that should help with your finances. 

 

Mental accounting

Having rules of thumb (like 50% of spending to needs, 30% to wants and 20% to savings) actually works. 

It also helps people save more, especially if you are using different bank accounts (e.g. a needs account. A wants account. A savings account). 

 

Big goals vs small goals

People save 82% more if you say "I'll just focus on savings $100 a week." Rather than "I want to save $5k". 

 

The Save More Tomorrow approach   

This method takes half of an employee's pay increase and adds it to a savings account, repeating every time they get a pay rise.  

During this study people went from saving 3.5% of their pay to 13.6%. 

 

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Episode Transcript

Speaker 1 (00:07):
You're listening to the Saturday Morning with Jack team podcast
from news Talks at B.

Speaker 2 (00:12):
Well, the latest economic data was out this weekend. It
priints a pretty grim picture of economic activity in New
Zealand at the moment. I think a lot of us
are looking at any way to save a bob or two,
not just by avoiding splashy purchases like brand new chrome
coffee machines. But Ed McKnight, our money guy from Opie's Partners,

(00:33):
is here this morning with some saving tips backed by science.

Speaker 1 (00:37):
Gotta Ed get a Jack.

Speaker 3 (00:40):
It's start off with some mental accounting and there are
some kind of simple rules of threat thumb that can
actually work. Right.

Speaker 4 (00:47):
Yeah, well, this is quite interesting because you often see budgeting,
budgeting advice or TikTok Instagram or even or news talk
said B and you sometimes want to do these tips
really work, and so that's why I started digging through
the university papers to find these kind of science based
savings tips. And when it comes to bed accounting, you

(01:07):
often hear of these rules of thumb, like you should
spend fifty percent of your money on your needs, thirty
percent of your money on wants, and twenty percent on savings.
And there's a really good book by the Barefoot Investor
out of Australia who's got some similar kind of buckets
about how you should split up your money. Now, the
question I had was does this really work? It Actually

(01:28):
the ounces yes. There was some research out of the
University of Chicago and economists called Richard Salor, who's absolute genius,
and he found that if you follow some of these
simple mental rules of thumb, or what he calls mental accounting,
you do end up saving more. But to do it
the right way, what we've got to do is we've
got to split up our money into different accounts. So

(01:51):
back in your oldie days, when you got paid at
a little brown paper envelope, people would split up their
money into those different envelopes and you'd have your food
envelope and you, yeah, whatever it was that you're spending
money on, you'd have different envelopes. And it turns out
that actually works that in the modern day, if you
get your pay it and you have some automatic payments
go out into whether it's your needs account to your

(02:15):
wants bank account and your saving spank account, that actually works.
People end up saving ten percent more compared to if
you just had all your money in the wash.

Speaker 3 (02:24):
Yeah, yeah, I see. That's so interesting. It's funny how
human nature works like that. But I've got a lot
of friends who budget that way and they say the
same thing. That really does if you have those different pots,
if you like, it does make a big difference. Another one,
another tip back by science that is kind of like
running a marathon in a way, is that instead of
focusing on big goals, you've got to break things down

(02:47):
into bite sized chunks.

Speaker 2 (02:49):
Yeah.

Speaker 4 (02:49):
This is fascinating because often people say, right, set a
big savings goal, get yourself excited. You know, I want
to save five grad this year, or I want to
save ten grad this year. Well, the research out of
a university in Texas, Rice University, says that's actually the
wrong way to go about it. And the reason it is,
if you've set a big goal and say I would
to save five grand this year, there may be this

(03:10):
week or I won't save quite as much because I'll
make up for it later. Yeah, but what actually works
is if you just say, okay, five grand in a
year is about one hundred bucks a week, So I
have just got to focus on saving one hundred bucks
a week. I'm not going to focus on that big goal.
It's just what do I need to do this week,
this fortnight, this month, depending on when you actually get paid,

(03:32):
and using something like a habit tracker, whether it be
I mean, there are great ones out there for your iPhone,
whether it's progress or habitafi Strides is another one. If
you just say, Okay, I need to set one hundred
dollars aside for the next five weeks and see how
I go. That works. People end up saving eighty two
percent more when they do it that way.

Speaker 3 (03:52):
Wow, that's amazing. Okay, eighty two percent more is huge.
There's also the save more Tomorrow approach, which is like
a behavioral economics track.

Speaker 4 (04:02):
Yeah. Now this is an interesting one which might seem
counter to the one we just to talked about. But
the idea here is when you start out at a job,
you're not earning much, so it's really hard to save
because you're income slow. And what these guys again it
was out of the University of Chicago. What they did
is they went to a bunch of employers and they said,
next time you give any of your employees a pay rise,

(04:23):
offer them the chance to put half of that pay
rise into savings, and every single time they get a
pay rise, say do you want to put half of
that regularly into savings? Well, blow me down. Four out
of five employees when offered this, sign up for it.
At eighty percent of the people who sign up and
take this approach stick with it for four years. The

(04:43):
amazing thing is this actually works on average. In their study,
people went from saving about four percent of their income
to fourteen percent of their income over that four year period,
so that one again definitely works.

Speaker 3 (04:56):
Yeah, that's amazing. Okay, cool, Thank you so much.

Speaker 1 (04:58):
Ed.

Speaker 3 (04:58):
We're going to put all of those tips up on
the News Talk Z'B website. Our money guy there Ed
McKnight from Op's partners for.

Speaker 1 (05:05):
More on Saturday Morning with Jack Tame. Listen live to
News Talks at B from nine am Saturday, or follow
the podcast on iHeartRadio.