The lack of self-control is one of the main reasons many fail to save for retirement or a rainy day. We get our paycheck and on our way home from work we stroll by our favourite mall and treat ourselves just a bit – this is at least what we tell ourselves. Some buy those new AirPods, some buy a new perfume or a pair of sneakers, … sounds familiar. Then we buy groceries, pay our bills and mortgage, go to the movies and dinner with our friends and pretty soon our paycheck is gone and the money we intended to put aside and save is gone.

We swear to ourselves that next month is gonna be different, but in most cases the cycle repeats and 30 years fly by and we have next to nothing saved for retirement. Reading The Odyssey just the other day with my kids made me think, what lessons can we learn from the legendary hero Odysseus (or Ulysses), to help us save for retirement or a rainy day. I know, it’s just a typical question one gets when reading The Odyssey, right?

So let’s remember what Odysseus was all about. He is a legendary hero in Greek mythology and the central character of Homer’s epic poem “The Odyssey.” He is known even to this day for his intelligence and resourcefulness. He devised the Trojan Horse used to win the epic siege of Troy and after the fall of Troy he embarked on his now legendary ten-year journey home to Ithaca, a small island kingdom in the Aegean Sea, where his wife Penelope and son Telemachus await. In the middle of his journey on an island between Scylla and Charybdis Odysseus and his crew encountered the Sirens, creatures who sang a irresistibly beautiful song that lured sailors to their deaths on the rocky coast. Odysseus being Odysseus still wanted to hear their beautiful song and thought out an ingenious plan on how to hear their song and at the same time survive it. To avoid being lured by the Sirens’ song, Odysseus had his crew tie him to the mast of his ship and fill their ears with wax so they could not hear the song. As they sailed past the island of the Sirens, Odysseus begged his men to untie him, but they refused and sailed past safely. So what’s all of this got to do with retirement saving and investing?

Odysseus had him tied to the ship’s mast and used it as a “commitment device” in order to resist the temptation of the Sirens’ song. In this way he was effectively committing himself to not giving in to the temptation to steer the ship towards the rocks, even if he wanted to. This helped him to resist the sirens’ song. Commitment devices are a type of self-binding strategy used to help people stick to a course of action they have chosen in advance, despite the temptation to do otherwise. They are used to prevent future self from acting against the present self’s better judgement. In this case, the mast acted as a physical “commitment device” that prevented Odysseus from steering the ship toward the rocks and ensured the survival of Odysseus and his crew.

A commitment device is a tool or strategy that individuals or groups use to lock themselves into a course of action in order to achieve a specific goal or overcome a particular obstacle. It is designed to make it difficult or impossible for the person to change their mind or behaviour once they have committed to a particular plan of action.These mechanisms are used to overcome cognitive biases and self-control problems that might otherwise cause an individual to procrastinate or abandon their goals.

Commitment devices can be very helpful in achieving our financial goals, as they can make it easier to stick to a budget, save money, and invest for the future. Some of the best examples of commitment devices used in finance are savings plans with automatic payroll deduction of contributions. These programs automatically transfer a set amount of money directly from your paycheck to your savings or retirement account each month. By setting up the automatic payroll deduction, you are committing yourself to saving a certain amount of money each month and this makes sure your contributions to the retirement account are made before you have the time to buy those new AirPods. Even more, most countries offer special tax incentives for employee contributions to retirement plans, like 401(k) plans in the US where employees can make pre-tax contributions to their plans each year up to a certain limit and in this way you are reducing your taxes at the same time. We have a similar favourable tax treatment of employee contributions to retirement plans in my home country Slovenia.   

401(k)s have another feature that could be considered as a commitment device and those come in the form of investment “lock-ins”. These kinds of accounts have a penalty for withdrawing money before a certain age and this “helps” us keep the money invested for the long-term. In Slovenia, if you save in a collective retirement account financed by your employer, you can only start to draw down your savings at retirement and many countries have similar “lock-ins” for retirement accounts.  

In recent years many saving Apps came on the market that can help us to track our spending and budgeting. These tools can also be considered as a commitment device as they hold individuals accountable for their spending and make it super easy to make special saving rules that automatically set aside a certain amount of money each time you buy a cup of coffee at Starbucks, for example. mBills app developed in Slovenia enables me to put away €1 each time I use the app to pay for my lunch and the savings go to a special sub account intended for my daughter’s new bike. There are many similar apps, like Acorns and Qapital, which are gaining in popularity.     

The main feature of payroll deduction is that it can help an individual to save money and invest for the future by making it automatic and constant, reducing the temptation to spend that money on something else. After it is set it also requires no work from us (set and forget) and then our natural tendency to procrastinate and save our cognitive energy starts to work in our favour. Payroll deduction also has the advantage that it can be set-up easily and usually with low transaction costs. You can read more about using payroll deduction to achieve financial wellbeing in the workplace in this great post from the Money and Pension Service.

So the next time you are trying to resist the temptations to spend your paycheck remember Odysseus and the Sirens. There is a smarter way of ensuring you can socket away some money before it lands in your checking account and this is with the help of payroll deduction. 

Further reading:

1. Elster, John (1984). Ulysses and the Sirens: Studies in Rationality and Irrationality. Cambridge University Press; 1st edition (January 1, 1979).
2. Ashraf, N., Karlan, D. & YinTying, W. (2006). Tying Odysseus to the Mast: Evidence From a Commitment Savings Product in the Philippines. The Quarterly Journal of Economics, Volume 121, Issue 2, May 2006, Pages 635–672. Available at: https://doi.org/10.1162/qjec.2006.121.2.635
3. Money and Pension Service. Payroll-deducted saving schemes. Available at: https://www.moneyandpensionsservice.org.uk/financial-wellbeing-in-the-workplace/payroll-deducted-saving-schemes/