I want the reward at the end
Sticking to a goal to save money, stop smoking – or anything else – can be a challenge. But research suggests incentives, such as a financial reward, may help. An unusual bank account in South Korea taps into this idea, with a report by The Guardian saying the account offers the incentive of a higher interest rate for customers who lose weight – perhaps helping those with the dual goals of boosting savings and losing weight. Less formal arrangements can be made between friends and family to encourage positive habits. One example could be a parent agreeing to top up a child’s savings fund by 10% if they reach a savings goal within a set timeframe.
Which is more effective – a carrot or a stick?
Incentives may help with motivation in the short-term but some suggest penalties are a more effective method over time. Instead of getting a financial reward if a goal is achieved, under a penalty arrangement, the person faces paying a penalty if they do not reach the goal. Research published on the SSRN website, for example, examines the effectiveness of rewards and penalties when trying to get people to only use their share of a limited resource. It suggests penalties work better over time.
Using rewards to save
Savers might set up a deal with a friend to provide extra motivation to reach a goal. An effective strategy might be for the saver to pay a penalty if they don’t reach their goal. Even better is to back up the deal by having a complete plan – such as making a budget and sticking to it.