Week 3: Why We Plan to Save—and Still Don’t: A Deeper Look at the Behavioral Life-Cycle Hypothesis

A familiar struggle

John is 36, married with Angela. He works in Finance, makes a decent salary, and has read quite share of personal finance blogs and podcasts. Every New Year he resolves to save more aggressively. He opens their banking app, sets up a monthly transfer into a savings account, and promises himself he’ll keep it untouchable.

By March, the system starts to unravel. A last-minute trip with family, a couple of new gadgets, and “just one more take-out, because it was a quite hard working week” eat into the buffer he had carefully set aside. By June, John feels guilty — but not enough to change his behavior.

If you recognize yourself in John, you’re not alone. Across developed economies, individuals routinely undersave, overspend, and deviate from their own long-term financial plans.

“The greatest gap in life is the one between knowing and doing.” — John Maxwell

That gap — between what we intend to do and what we actually do — is exactly what the Behavioral Life-Cycle Hypothesis (BLCH) sets out to explain. This is not only applicable to our finances, but also applicable to your health or studies.

There is written so much information about this hypothesis or theory that we could not fit it in a blogpost. Even for a deep-dive it became too much. Therefore you can find here a short version of it with the more important parts. The real deep dive you can find on this page:

The Behavioral Life-Cycle Hypothesis: Why We Struggle to Save, and What To Do About It

From Elegant Theory to Everyday Life

The Classical Curve (LCH)

In the 1950s, Modigliani and Brumberg proposed a beautifully simple hypothesis:

• Young: Borrow against future income.

• Midlife : Save aggressively as earnings peak.

• Retirement: Spend down savings smoothly.

It works, in theory —if people can forecast lifetime income reasonably well, access borrowing and saving freely, and behave like bias-free calculators. Unsurprisingly, that’s not most people.

Where the Curve Cracks

Real households routinely:

• Undersave relative to their own goals.

• Overspend windfalls like bonuses or refunds. See mental accounting

• Face credit frictions (borrowing when young isn’t easy or cheap).

• Procrastinate, even when saving is possible.

• Unpredictability. life is not a model that is the same for everybody. Sometimes you lose your job, get sick or take sabbaticals.

Policies built on the classical model (e.g., purely voluntary pensions) often underperform until someone adds “behavioral plumbing” like defaults, automation, or commitment devices.

The Behavioral Upgrade (BLCH)

Economists Hersh Shefrin and Richard Thaler reframed the life-cycle story around psychology. BLCH keeps the lifetime perspective but puts human quirks in the driver’s seat. Three pillars anchor the model:

1. Mental Accounting—Money Isn’t Fungible in Our Heads - We create buckets:

   • Current income: paychecks and cash on hand (easy to spend).

   • Current assets: savings and investments (spendable with hesitation).

   • Future income: pensions and expected earnings (psychologically distant).

   The same €1,000 feels different depending on its bucket: a tax refund labelled “extra” evaporates faster than the same €1,000 buried in a retirement account.

2. Self-Control Problems—Planner vs. Doer - Inside each of us:

   • The Planner values long-term security.

   • The Doer wants sushi tonight.

   Credit cards and “Buy Now, Pay Later” (BNPL), like Klarna, tilt the field to the Doer by separating consumption from payment and dulling the pain of paying.

3. Framing Effects—The Story Changes the Choice - Present the same stock of wealth as a monthly income and people spend steadily; present it as a big pot and they hesitate. Losses loom larger than gains, so “raiding savings” feels worse than “spending a bonus,” even at equal amounts.

BLCH ties these pillars to broader behavioral insights: Prospect Theory (loss aversion, reference points) and mental accounting (labels drive behavior). Its unique contribution is integrating them over the whole life cycle and making the Planner–Doer conflict explicit.

What the Evidence Says (in Plain Language)

• Windfalls are “hot money.” Households spend refunds and bonuses faster than regular pay. Labels like “extra” raise the propensity to consume.

• Defaults transform outcomes. Auto-enrollment in pensions routinely lifts participation from ~50–60% to 80–90%+. “Save More Tomorrow” schemes that pre-commit a slice of future raises push saving rates sharply higher.

• Reporting frequency shapes risk-taking. Frequent portfolio checks trigger more loss aversion and worse timing; longer horizons calm investors.

• Fintech can stealth-help. Round-ups, automatic sweeps, and paycheck splitting exploit mental accounting to move money into the “future” bucket before the Doer can reach it.

Together, these findings don’t just fit BLCH—they’re what BLCH would predict.

Today’s Money Traps and Tools Through the BLCH Lens

Retirement: Why “Set-and-Forget” Wins

• Problem: The Planner wants a secure retirement; the Doer wants lifestyle now.

• BLCH Fix: Make the prudent path the path of least resistance (auto-enroll, auto-escalate, default investment funds). The Planner wins by design, not willpower.

Your move: If your employer offers auto-enroll, stay in. If not, create your own default—automate transfers on payday into a retirement account you don’t see in daily banking.

Credit Cards & BNPL: The Doer’s Playground

• What they do: Delay pain, disguise totals (“4 easy payments of €50”), and turn limits into “available money” in our heads.

• Result: More spending now; a foggier picture of future obligations.

Your move: If overspending is chronic, switch to debit for daily spending. Or use “pre-payment framing”: park money in a bill-pay sub-account at purchase time so the Doer can’t pretend the cost is tomorrow’s problem.

Policy: Nudges That Respect Humans

• Defaults, reminders, and commitment options succeed because they channel—not fight—our psychology. Good policy aligns institutions with the Planner’s goals while preserving choice.

Marketing: The Same Tools, A Darker Use

• “Only €2/day!” reframes a pricey subscription as trivial. Free shipping nudges you to inflate the “shopping” bucket. Scarcity timers arm the Doer with urgency.

Your move: Add friction back (cool-off timers, unsubscribe from promo emails, remove shopping apps, like TEMU). Give the Planner home-field advantage.

Critiques—and Why BLCH Still Helps

• “Too descriptive?” BLCH can feel like it explains everything after the fact. True—but it’s also actionable. It told us in advance that auto-enrollment and pre-commitment should work, and they did.

• Culture matters. The Planner–Doer tug-of-war appears globally, but magnitudes vary with social norms, safety nets, and credit markets. Calibrate design to context.

• Overlap with other models. BLCH borrows from Prospect Theory and present-bias models. Its value is integration across a lifetime, not invention of new biases.

Think of BLCH as a map, not the territory. Imperfect—yet immensely useful for navigation.

Make BLCH Work for You: A Practical Playbook

1) Redesign Your Buckets

• Create three visible accounts: Spending (Now), Safety (Soon), Freedom (Later).

• Rename with intent. “Freedom Fund” beats “Retirement Account”; “Peace of Mind” beats “Emergency Fund.” Labels cue behavior.

• Keep Freedom and preferably also Peace of Mind at a different bank to add psychological (and practical) distance. -> For example move these amounts to a company like RAISIN, which offers higher interest rates than your own bank.

2) Automate Before Temptation

• Split your paycheck automatically: e.g., 70% Spending, 10% Safety, 20% Freedom.

• Turn on auto-escalation: each raise boosts Freedom by +2–3% automatically.

3) Install Speed Bumps

• 24-hour rule for purchases >€100.

• Remove one-click options; require re-entering card details for discretionary sites.

• Weekly financial “pit stop”: 10 minutes to check buckets, not prices.

4) Flip the Frame

• Recast saving as buying time and optionality, not deprivation.

• Use loss frames to your advantage: “If I spend €100 now, I lose future €X growth.” -> Check our Should I buy it? tool

• For retirement, think income, not pot: “I’m building a lifelong paycheck.”

5) Pre-Commit and Lock

• Use term deposits, prize-linked savings, or app-based vaults for near-term goals.

• Write a one-line pact: “Each raise increases my Freedom contribution by 2%.” Sign it. Tell a friend or familymember. (Public commitments stick.)

6) Tame Credit & BNPL

• Don't use creditcards or Buy-Now-Pay-Later option, but if you do;

• Treat credit limits as danger levels, not available cash.

• Track total scheduled payments for all BNPL plans in one place.

• If you must use credit, pre-fund a bill sub-account at purchase time.

7) For Couples and Families

• Discuss your plans regularly. Make sure you have the same goals.

• Map each person’s buckets; agree on joint defaults (e.g., split windfalls 50% fun / 50% future).

• Automate a shared Safety buffer; keep personal fun money separate to reduce friction.

8) Build an Anti-Regret Loop

• Keep a one-month regret log (what would you undo within 24 hours?). Target those categories with stronger speed bumps or prepaid budgeting. -> You can track it for all your transactions with our mental accounting tool

The Big Takeaways (so you actually use this)

• Finance is psychology. People don’t think in equations; they think in stories and buckets.

• Systems beat willpower. Persons have a limited amount of willpower everyday. So Automate, relabel, add friction, pre-commit.

• Design your environment. Make the right action default; put distance between you and temptation.

• Use the right tools. Defaults, round-ups, paycheck splits, commitment accounts—small hinges that swing big doors.

You don’t need perfect discipline. You need architecture. Build a money system where your Planner quietly wins—even on Tuesday nights when your Doer really wants takeout and a shiny new gadget.