Put Money in an Illiquid Account to Save Money
We’ve talked about this before: money has a lot to do with thinking. When your money is harder to access (it’s illiquid), you’re less likely to, well, get access to it. It’s obvious, but according to a study published by the National Bureau of Economic Research , most people are aware of this, and that illiquidity actually promotes savings.
The researchers presented subjects with savings accounts with varying limits and then asked how much they wanted to save on each type of account. They found that the more fines an account had, the more money people put in it. When the account was liquid, which meant that the money was easy to withdraw, the subjects did not save as much. The researchers write:
Each participant splits the money between a liquid account that allows unlimited withdrawals and a mandatory account with withdrawal restrictions, which are randomly distributed among the participants. When the same interest rate is paid on two accounts, the most illiquid mandatory account attracts more money than any other mandatory account. We show theoretically that this model is consistent with the presence of sophisticated biased agents who favor more illiquid mandatory accounts, even if they are subject to uninsured marginal utility shocks arising from a wide class of distributions.
Basically, the results show that we are aware that we lack self-control, so we protect ourselves from overspending by investing more money in hard-to-reach accounts.
The Atlantic goes on to suggest that tougher early withdrawal penalties on 401 (k) and other accounts could inspire people to actually save more. Of course, this is just one study and it’s hard to tell if that’s true or not, plus there’s such a thing as overrun .
However, this is an interesting look at our financial habits. It also maintains the habit of saving money in a certificate of deposit (CD) or keeping a savings account at a separate bank from your checking bank. The general statement is that the more difficult it is to access your money, the more inspiration you will have to increase your savings.
Check out the full study at the link below.