Saving a lot. Often. And again.

July 27, 2018

June found me chaperoning an 8th grade field trip in the Lake Champlain islands. One of the students, a recent immigrant from Africa, discovered that I worked in investments. She followed me around all day, asking questions. The idea that you could make money based on money was so foreign to her that it seemed like magic. She would pose a question, wander away, and return with a follow-up. At one point she asked "But how do you make money from money if you don't have money to begin with?"

To which I responded: "You work hard. You save a lot. And you own businesses via index funds."

It's difficult to overstate how much the middle phrase matters. "You save a lot." As I've mentioned, One Day In July is building a financial simulator, and I've taken it for a spin a few times. Monthly, recurring saving, when plugged into an excellent investment model, delivers an enormous boost to the compounding effect.

Yet it's not all that common. Even when people can save (and many people cannot!), they don't save much. The U.S. savings rate fell to a decade-low 3.1% in the fall of 2017. (1) Let's look at three of the bogies in the room.

1. Peer pressure. It exists in middle school, high school, and it never fully goes away. There is a sense that once someone in your friend group has something, you need it too. Innate to humans and other species, this desire for inclusion is wired deeply into our brains and requires constant training to counter. In economics, this is known as the relative income hypothesis.

2. Endorphins. For a short time, the act of purchasing something creates an endorphin rush. Due to its addictive properties, this drives purchasing toward an ongoing rhythm. As Buffett says "chains of habit are too light to be felt until they are too heavy to be broken."

3. Laziness. It's easy to use money to buy convenience. We are all susceptible to it.

A long time ago, I realized I had to do something about this. The better the investment model became, the more the input (savings) mattered. If the investment program is a dumpster fire, inserting capital into it doesn't have much effect.

But how to effect the needed behavioral guiderails? I decided to implement certain behaviors that would push me down the rewards curve, as if I was living life in reverse. As one example, I will go for a run in negative degree temps late at night in January in Vermont. This is a very inexpensive way to provide entertainment while achieving endorphins. There is a certain amount of pain involved. But it works because when I come back up the rewards curve, something like a $3 gourmet coffee seems fantastic. I don't need a $100,000 boat to feel great. The remaining $99,997 goes to indexing.

You can experiment with your own ideas, but the result is not just that you want to save. You want to save *a lot*. This is a critical behavior to establish in the lifelong transition from worker to capitalist. I'm pretty sure my new 8th grade friend was a convert.

Dan Cunningham