5 ways you've been saving money wrong

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Like a big fat bowl of broccoli, discussing the contents of our bank accounts is one of the most unsavory topics known to mankind.

That’s probably because we’re so god awful at it.    

The average American tucked away just 4.7% of their income per paycheck as of 2012, when most experts suggest more than double that amount.

That's a decline from our recent high of 5.4% in 2008, according to Nerdwallet, the year we ushered in the Great Recession. But economic turmoil or not, Americans have never been the savviest savers. We’ve saved less and less almost every year since the early 1980s, tumbling like a rock from a nearly 11% savings rate in 1981 to an embarrassing low of 1.5% in 2005. Meanwhile, consumers in developed nations like Australia, Germany and Switzerland are tucking away close to 10% or more.

There are so many self-help books on the topic that we’re pretty sure our financial incompetence is single-handedly keeping the lights on at Barnes & Noble.

But not all strategies to save more are fool-proof, let alone rigorously tested. So we decided to come up with a list of research-proven ways to get out of our own way and really start ramping up your savings goals.

1. You're using too many bank accounts.

If you thought spreading your income across multiple bank accounts was helping you save more, you might actually be doing more harm than good. University of Kansas professor Promothesh Chatterjee found that people tend to save more and spend less when they have ONE bank account, compared to several. When you have multiple accounts  — especially if they are held at different financial institutions — it’s easier to lose track of your goals and stay on top of where your money is going.

Chatterjee attributes his findings to two well-known behavioral theories: “motivated reasoning” and “fuzzy-trace theory.” Motivated reasoning suggests that people love spending so much that they’ll often search for excuses to do it. When we have our money spread over various accounts, it becomes harder to perceive our actual balance (enter the fuzzy trace theory), which in turn makes it easier for us to distort all the balances and convince ourselves we can spend more and save less.

“If you’re really opposed to consolidating, you can at least try to reduce the vagueness of having money across multiple accounts by utilizing software and services that provide a consolidated view of all of your accounts in one place,” Chatterjee says. “This type of aggregate reporting could help reduce vagueness and enhance savings.”

2. You're making too many decisions. 

President Barack Obama made headlines when he shared his simple reasoning behind only keeping blue and black suits in his closet: “I’m trying to pare down decisions. I don’t want to make too many decisions about what I’m eating or wearing. Because I have too many other decisions to make,” he said.

He has a point. We can’t all be president but each of us has our own mini-country to run, whether it’s our families, our careers or, in most cases, both. Deciding to save money every week or month is only adding to our list of monotonous to-dos. So don’t make it an option. Automate your savings and you’ll never have to think about it. In several experiments Florida State University researcher Roy Baumeister found that by turning boring, tedious tasks (hello, saving!) into no-brainer routines you do without thinking, you’ll be more likely to stick to them.   

It’s an obvious concept, but most importantly, it works. The National  Bureau of Economic Research studied 200,000 employees at seven companies and found the savings rates of people who were auto-enrolled in 401(k) plans were double those who had to manually enroll.

3. You're not using your imagination.

There’s a reason athletes scrawl next week’s game plan on giant chalk boards and renters pin photos of their dream house on the fridge: visualization can be an incredibly effective source of motivation to achieve our goals. That goes for saving, too. Researchers have found that imagining ourselves in the future — sailing around the world in retirement or tanning on the beach on next year’s vacation — can help us save more today.

That’s why financial institutions are experimenting with tools like Merrill Edge's Face Retirement generator, which can create an image of what a person will physically look like in retirement, in the hopes that would motivate them to save more.

The tool is based on a series of experiments conducted at Stanford University and published in 2011, which found that people who saw age-progressed photos of themselves considered saving more money for retirement.

Alternatively, you could do something as simple as give your savings accounts a specific title (“Trip to California” or “Rainy Day Fund”) or stick photos of your dream retirement destination on your desk to make your financial goal more real.

4. You're going it alone.

Put those high school memories behind you — a little peer pressure can be an excellent way to save more. When nearly 2,700 Chilean entrepreneurs were put into self-help peer groups in October 2012 to help them save more, researchers found that the added dose of peer pressure was a powerful incentive to save. The number of deposits the participants made to their savings accounts grew more than three-fold and the average savings balance almost doubled. 

You could mimic this experiment on your own by inviting your friends, family or spouse to compete for a savings goal like a family vacation or a new car. It’s a concept that apps like Tykoon use in full force, letting parents track their kids’ saving and spending and reward them along the way.

5. You're over-thinking your investments.

We'd all love to be the next Warren Buffett, but most retail investors would be better off not trying to pick stock winners. A recent paper by Portfolio Solutions and Betterment, "The Case For Index Fund Portfolios,” confirms that low-cost, passively managed index funds are almost always the best option for individual investors.

Unlike actively-managed funds, index funds don’t rely on investment managers (i.e.: humans) to pick and choose which stocks to hold. Instead, passive funds like the S&P 500 index fund let you spread your capital across a wide range of companies, effectively putting your holdings on auto-pilot. Because they cost so much less to operate than actively-managed funds, they eat up less of your returns, which translates to more money in the bank. 

Looking at investment portfolios holding 10 asset classes between 1997 and 2012, Portfolio Solutions and Betterment researchers found index fund portfolios outperformed comparable actively managed portfolios a staggering 82% to 90% of the time. And the longer investors held those investments, the better shot they had at outperforming active funds over time.

Still not convinced? Even lowering the cost of actively managed fund portfolios couldn't offer a boost significant enough to outperform index funds, the researchers found.

“The outcome of this study statistically favors an all-index fund strategy, all the time," the report says. "The probability of outperformance using the simplest index fund portfolio started in the 80th percentile and increased over time and with additional asset classes. These results have significant and practical implications for investors who seek a strategy that can give them the highest chance of reaching their investment goals.

Read more:

5 things we do to save money but all secretly hate

Why you're better off graduating in a recession

The wealthiest heirs in America

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