How Commitment Devices Can Help Boost Your Savings
Wharton business school professor Katy Milkman—host of Schwab’s Choiceology podcast—has devoted her career to the study of behavior change. In the following passage from her new book, How to Change: The Science of Getting from Where You Are to Where You Want to Be, Katy shows how “commitment devices” can help boost your savings. And Schwab’s own Mark Riepe offers tips for how apply this approach to your broader portfolio.
As this example illustrates, commitment devices are a proven way to make meaningful progress toward your savings goals. So, what sorts of commitment devices can you deploy in your own finances?
Mark Riepe, head of the Schwab Center for Financial Research, says any type of account that charges a penalty for nonqualified withdrawals is a good commitment device. “The consequences of breaching a commitment need to be pretty severe,” he says. “That’s why 401(k)s and IRAs are such effective savings vehicles—the 10% early-withdrawal penalty helps deter people from tapping the funds before retirement.” Health savings accounts and 529 college savings plans are two other types of special-purpose vehicles that can help lock up your savings for specific goals.
Another strategy is to set up automatic, recurring contributions to your savings accounts. “When you combine automatic contributions with ‘locked’ accounts, you’re doubling down on the commitment,” Mark says. “Sure, you could turn off the contributions at any time, but it’s easier to stay committed when it just happens automatically.”
Whatever methods you choose, Mark says you can further raise the stakes by sharing your intentions with family, friends, or even a financial planner. “No one wants to admit that they didn’t achieve what they set out to do, and that little added pressure could be all it takes to get the commitment to stick,” he says.
1Nava Ashraf, Dean Karlan, Wesley Yin, and Marc Shotland, “Evaluating Microsavings Programs: Green Bank of the Philippines (A),” Harvard Business School, 02/2014.
2“What Resources Do Families Have for Financial Emergencies?” Pew Trusts, 11/18/2015.
4Philippine Poverty Statistics, National Statistical Coordination Board, Population Income and Employment Division and Health Education and Social Welfare Division, 01/2000
5Dean Karlan, 05/07/2020.
6Nava Ashraf, Dean Karlan, Wesley Yin, and Marc Shotland, “Evaluating Microsavings Programs: Green Bank of the Philippines (A),” Harvard Business School, 02/2014.
7Dean Karlan, 02/15/2020.
Excerpted from How to Change: The Science of Getting from Where You Are to Where You Want to Be by Katy Milkman; foreword by Angela Duckworth, in agreement with Portfolio, an imprint of Penguin Publishing Group, a division of Penguin Random House LLC. Copyright ©Katherine L. Milkman, 2021.
What You Can Do Next
Listen to the Choiceology episode, “The Price of Your Vice,” to learn more about the science behind commitment devices—or explore other episodes from Seasons 1–7.