Why Saving Goals Don’t Always Help Consumers

Research shows goals to save money can backfire, unless they are used carefully.

Posted Jan 12, 2016

Americans have a serious saving problem. By and large, they simply aren’t saving enough money. Media outlets routinely report worrisome statistics from financial surveys. For instance, one survey recently found that 49% of Americans have no savings at all[1]. And a December 2015 survey from Bankrate.com reported that only 37% of Americans have enough savings to pay for an emergency costing $500 or more[2]. To cover the emergency, everyone else would have to resort to cutting their spending or borrow money from family or friends. While specific numbers and percentages differ from one survey to the next, all are consistent in concluding there is a saving crisis in America.

To encourage saving, personal finance experts including economists from the Consumer Financial Protection Bureau suggest using saving goals[3]. The idea is that establishing a saving goal and then striving to reach it will increase peoples’ savings.

Popular personal finance gurus like Dave Ramsey and Suze Orman have two goals for people getting started with managing their personal finances resolutely: (1) a shorter-term goal of a “liquid” emergency fund of $1,000 or $1,500 in cash for unexpected expenses, and (2) a longer-term goal of a “living expenses” emergency fund with 6–8 months of living expenses. As Suze Orman says about this second goal:

“I know that’s a lot, but I want you and your loved ones to be okay if you were ever laid off, or sick for an extended period of time. Sure, it could take years to reach your eight-month goal. That’s totally okay. The important issue is that you are starting to save today and so every month you will be moving closer to your goal[4].”

Despite such enthusiasm, the notion of using goals to save money successfully is not fully supported by recent consumer psychology research. 

So what types of saving goals don’t necessarily help consumers? Here are five types of saving goals that could backfire, along with research-backed lessons regarding each one.

  • A difficult “stretch” saving goal that is violated. The conventional wisdom is that setting difficult goals energizes people. But the reality indicates the opposite. When consumers set a saving goal and then fail to meet it, they end up spending more money afterwards than if they didn’t have a goal at all! In one study[5] conducted by psychologists Dilip Soman and Amar Cheema, Hongkongers who had set a monthly saving goal were more likely to make significant unplanned purchases upon violating their goal. For example, if they had a monthly goal of saving $2,000 HK dollars (approximately USD $260), but failed to reach that goal in one particular month, they were then willing to spend even more money from their discretionary budget that month.
  • A saving goal that is too easy. On the other hand, for people who are not saving any money at all, many financial experts advise starting with baby steps. A common suggestion is to start saving 1%, 2% or 3% of income[6]. But in the US, the personal saving rate has hovered around 5% in most months since 2000[7], and even this rate is far too low for a comfortable retirement. No matter the income, a healthy personal saving rate is 15% to 20% of before-tax income. Not surprisingly, psychological research shows that easy goals don’t motivate people much, and have little effect on longer-term outcomes[8]. The bottom line is that setting a saving goal that is too low may leave savers in the lurch. The key, then, is to set a goal that’s “just right” or moderately difficult, neither too easy nor too difficult.
    401(K) 2012 Flickr Licensed Under CC BY 2.0
    Source: 401(K) 2012 Flickr Licensed Under CC BY 2.0
  • A saving goal for too far into the future. How far into the future should a person look when setting a saving goal? Next month? Or every month for a year as many New Year resolutions encourage people to do?  Research shows that people tend to be wildly over-optimistic about money, both about how much they will earn and how much they will save in the future[9]. In other words, if you ask someone their saving goal for January 2017, they are likely to give you a much higher dollar estimate (compared to a goal for January 2016). But when the time actually comes, they are likely to save much less.  In one study that I conducted with Leona Tam of University of Wollongong[10], savers stated their saving goal was to save $308 in the very next month. But when asked about four months later, their goal was to save $655. How much did they actually save? Those in the next month group actually ended up saving $320, very close to their goal. But those in the “four months later” set saved only $140 in reality, less than 22% of their goal (and much less than those who set a saving goal for next month). What is the moral of this study? Saving goals set for the short-term are more useful, realistic, and predictive of actual saving behavior. Thinking too far into the future leads to over-optimism and under-saving.
  • A specific saving goal without considering "why." In social psychology there is an as yet unresolved debate about whether specific goals are more effective than nonspecific goals. In other words, does it pay to decide exactly how much you want to save beforehand? A study published in the Journal of Marketing Research reported some rather interesting findings about specific saving goals[11]. It showed that when people chose a specific savings goal such as “I want to save $100 next week” but then tried to achieve it by thinking about the specific actions they will take to achieve it, they ended up saving less money. What really helped savers with specific goals was to think about why they wanted to save the money. On the flip side, a non-specific saving goal was more effective when paired with thinking about how to achieve the goal. The main lesson of this research is, in the words of the authors, “Consumers with long-term saving goals…should benefit from specifying the amount they want to save….consumers with short-term saving goals …should not think about the precise amount they want to save[12].”
    Anthony Crider Flickr Licensed Under CC BY 2.0
    Source: Anthony Crider Flickr Licensed Under CC BY 2.0
  • A specific “single number goal” rather than a “high-low range” goal. Finally, let’s say I want to save a certain amount of money. What sort of goal will be more effective, “I will try to save $200 next month” or “I will try to save between $150 and $250 next month”? Recent research[13] reported by consumer psychologists Maura Scott and Stephen Nowlis shows that goals with a range are more effective in keeping people motivated over time to continue saving money than single number goals. The two ends of the high-low range provide two reference points to the saver, leading to a sense of both greater attainability and greater challenge.  As the authors say in their article, “the high-low range goal can offer “the best of both worlds” compared to the single number goal.”

When using goals to save money, consumers need to be careful not only in how easy or difficult their chosen goal is, but also think about how specific it is, why it is being chosen, and whether a range of values is being considered.

Beyond savings goals, there are other ways to save money effectively and consistently.  Next week, continuing on with the theme of saving money, I shall discuss some of my recent research on how saving money can be incorporated into one’s lifestyle.


I teach core marketing and pricing to MBA students at Rice University. You can find more information about me on my website or follow me on LinkedIn, Facebook, or Twitter @ud.

Disclaimer: The content in this blog post is provided for information purposes only. This information is not intended to be and does not constitute financial advice, investment advice, or any other advice, is general in nature and not specific to the situation or purposes of any individual.

[1] http://www.gobankingrates.com/savings-account/62-percent-americans-under...

[2] http://www.bankrate.com/finance/consumer-index/money-pulse-1215.aspx

[3] See this article from the Consumer Financial Protection Bureau’s Laura Schlachtmeyer as an example: http://www.consumerfinance.gov/blog/youve-got-goals-for-your-life-and-so...

[4] http://www.suzeorman.com/blog/emergency-fund-101/

[5] Soman, D., & Cheema, A. (2004). When goals are counterproductive: The effects of violation of a behavioral goal on subsequent performance. Journal of Consumer Research, 31(1), 52-62. The paper can be downloaded here: http://jcr.oxfordjournals.org/content/31/1/52.abstract

[6] Here’s a video by Clark Howard that makes this point: http://www.clarkhoward.com/saving-penny-per-dollar-big-difference. Also see this article on the website Generation X Finance: http://genxfinance.com/dont-have-any-money-saved-up-start-small-and-make...

[7] The Federal Reserve Bank of St. Louis maintains data on personal saving rate of Americans which can be found here: https://research.stlouisfed.org/fred2/series/PSAVERT. Usually, the personal saving rate is calculated as money saved as a fraction of the individual’s disposable income. Many experts have written that a rate of 5%, or even 10%, is simply not enough to meet one’s needs in retirement. For example, see here: http://www.nerdwallet.com/blog/banking/american-personal-saving-rate/

[8] This idea is found in many areas of psychological research. A good starting point is Edwin Locke’s goal-setting theory. Locke, E. A. (1968). Toward a Theory of Task Motivation and Incentives. Organizational Behavior and Human Performance, 3(2), 157-189.

[9] Zauberman, G., & Lynch Jr, J. G. (2005). Resource slack and propensity to discount delayed investments of time versus money. Journal of Experimental Psychology: General, 134(1), 23.

[10] Tam, L., & Dholakia, U. M. (2011). Delay and duration effects of time frames on personal savings estimates and behavior. Organizational Behavior and Human Decision Processes, 114(2), 142-152.

[11] Ülkümen, G., & Cheema, A. (2011). Framing goals to influence personal savings: The role of specificity and construal level. Journal of Marketing Research, 48(6), 958-969.

[12] This quote appears on page 967 of the article by Ülkümen & Cheema (2011).

[13] Scott, M. L., & Nowlis, S. M. (2013). The effect of goal specificity on consumer goal reengagement. Journal of Consumer Research, 40(3), 444-459.

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