Stash Your Money In An Illiquid Account To Motivate Savings

Stash Your Money In An Illiquid Account To Motivate Savings
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We’ve said it before: money has a lot to do with mindset. When your money is harder to access (it’s illiquid), you’re less prone to, well, access it. That much is obvious, but according to a study published in the US National Bureau of Economic Research, most people know this, and that illiquidity actually inspires saving.

Photo by Mizianitka.

Researchers offered subjects savings accounts with different restrictions, then asked how much they wanted to save in each type of account. They found that the more penalties an account had, the more money people would save in the account. When the account was liquid, meaning the money was easy to withdrawal, the subjects didn’t save as much. Researchers write:

Each participant divides money between a liquid account, which permits unrestricted withdrawals, and a commitment account with withdrawal restrictions that are randomised across participants. When the two accounts pay the same interest rate, the most illiquid commitment account attracts more money than any of the other commitment accounts. We show theoretically that this pattern is consistent with the presence of sophisticated present-biased agents, who prefer more illiquid commitment accounts even if they are subject to uninsurable marginal utility shocks drawn from a broad class of distributions.

Basically, the findings show we’re aware we lack self-control, so we safeguard ourselves from overspending by putting more of our cash in hard-to-access accounts.

The Atlantic goes on to suggest that tighter penalties for early withdrawal on accounts might inspire people to actually save more. Of course, this is only one study, and it’s tough to say whether or not that’s true — plus, there is such a thing as oversaving.

Still, it’s an interesting look at our financial habits. It also supports the habit of saving your money in a term deposit or keeping your savings account at a separate bank from your transaction account. The overall claim is: the harder your money is to access, the more inspired you’ll be to up your savings.

Check out the full study at the link below.

[National Bureau of Economic Research]


  • For those with a mortgage, just make additional payments instead. This is the ultimate illiquidity as redrawing requires substantial paperwork and approvals.

    Economically it also makes sense as after-tax returns on savings will never yield more than the outlay on mortgage payments (on a dollar-for-dollar basis).

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