This is a hidden column

getTagNameMorningstarCorporate:blog/riskbehavior

Sticking to a Budget With the Help of Incentives

How temptation bundling can help your clients save

Samantha Lamas

 

Budgets can force your clients to balance what they want now against what’s better for them in the long term. In this classic want-should conflict, a “want” is something that grants immediate pleasure, while a “should” is something that offers benefits much later – such as a healthy retirement savings.

Saving for a happy retirement may be easy for clients to grasp but harder for them to put into practice. So how can you help your clients stick to their budgets and save more? A method called temptation bundling may be a good place to start.

What is temptation bundling?

Temptation bundling comes from the study “Holding the Hunger Games Hostage at the Gym,” conducted by Milkman et al. The study tested the effectiveness of combining audio novels (a “want”) and working out (a “should”). The researchers hypothesized that gym attendance rates would increase by using guilty-pleasure audio novels as an incentive. Not surprisingly, they were right. Gym attendance rates increased when participants in the study were directed to only listen to the audio novels while working out.

How temptation bundling can help create new habits

Temptation bundling builds upon “want” behaviors to help create new habits. For instance, a client’s regular routine after receiving a paycheck may be to buy a tempting item as a reward. Temptation bundling introduces savings into the routine in order to get the “want” product, or reward. Only after reaching a certain savings goal could the client then get the reward.

Temptation bundling doesn’t solve for shortsightedness regarding long-term benefits, but it provides a framework that people can follow. For this to be effective, researchers Nava Ashraf, Dean Karlan, and Wesley Yin say the person must be a “sophisticated” prospective saver, meaning they must “recognize their self-control problems” and be willing to work to reach their goals. 

Using temptation bundling to help clients stick to a budget

Advisors can use temptation bundling with their clients when budgeting. Follow these steps:

  1. Create a budget.
  2. Set a savings rate.
  3. Pick a temptation. The temptation could be anything from a spa day to a trip to a ball game, but it’s important to set a price limit. Stick to something that costs less than 10% of your client’s biweekly income, or choose an experience that doesn’t require money, like a walk along a lake.
  4. Set a reasonable goal for clients to earn their reward. For example, a good goal could be sticking to a budget for four consecutive weeks. It’s OK for it to be a “small” goal, as long as it’s a good next step for them.

The important thing is to improve the client’s current saving practices without making it so difficult that they’ll give up along the way.

Rewards are key to temptation bundling

Not only do rewards help keep your client motivated and happy at shorter intervals, but they also make the task of budgeting more manageable. No one likes to be told how they cannot spend their own money, the very dollars they sacrificed hours to earn. But temptation bundling grants your clients the structure they need to stick to their budgets and save more, with some earned flexibility along the way.

Bring behavioral science lessons into the real world. Get Morningstar's advisor guide for practical tools and research to help your clients.

Download Now

The Advisor Toolkit

Get practical behavioral finance tools to help clients avoid common pitfalls.

The Investor Success Project

Read our latest research on how to help investors.