Commitment Contracts

Saving up for one’s retirement in the future or simply for paying the monthly bill can be a struggle for some people. It may seem easy to tell yourself to cut back on the expenses or make more money to pay your credit or obtain an investment portfolio. However, just like any goal you set in your life, reaching your financial goal is easier said than done.

Many people procrastinate in taking steps toward reaching their financial goal and tell themselves that there is still plenty of time in the future to clear the debt on their credit cards. Others might rationalize that they are still young enough to put so much money in investment or savings. If they are unable to reach their savings goal for a month or a year, they pat themselves on the shoulders and plan again to save but continuously fail.

Why is it so hard to reach a financial goal? Maybe it’s because there are just too many bills to pay or there’s just so much fun in buying new gadgets using credit cards and pay for them later. Or maybe it’s simply because no one is pushing you hard enough to motivate you into really reaching that financial goal.

If you are a person who wants to have that extra nudge to wake you up and feel the urgency to reach your financial goal, you might be interested in subscribing to a commitment contract with financial stakes. A commitment contract is a pact you make to yourself or another person that you will pay or save a specific amount of money every month or quarterly. Commitment contracts do not need any formal documentation thus making it ineffective because there are no consequences if you fail to reach your goal. In commitment contracts with financial stakes, a consequent punishment will push you to reach your goal.

An example of a commitment contract with financial stakes is the website in which you will be required to set a fee that you will incur for yourself when you fail to reach your set goal (Macqueen, 2009). This system is an application of the loss aversion principle in which people can be motivated to form the habit if they will lose money in not doing it (Goldhaber-Fiebert, Blumenkranz, & Garber, 2010; Macqueen, 2009).

In using this system, the client sets his or her financial goal by specifying the amount he wishes to pay in his credit card or money he wishes to deposit in his or her savings account. After doing this, an addendum is required in which the client also sets the penalty fee for his failure to comply with his set goal. By doing this, the system expects the client to reach his goal to avoid incurring any penalties to himself that will add an additional financial burden to him.

The proceeds of the penalty fee can be assigned by the client to a charitable institution or any other organization or person. A special feature is the system’s assignment of giving the deductions from the client to an institution that the person dislikes. Again, this is a negative consequence so that the client will not repeat the same behavior of not reaching his financial goal.

Using commitment contracts with financial stakes is an innovative way of reaching your financial goals. It may seem unpleasant to punish yourself for not committing to your goal but this system allows you to remove your debts gradually and save up for the future in the long run. This system will truly motivate you in reaching your financial goal and will teach you a lesson – fulfill the promises you make to yourself.


Goldhaber-Fiebert, J., Blumenkranz, E., & Garber, A. (2010). Committing to exercise: Contract design for virtuous habit formation. Retrieved from

Macqueen, A. (2009). Using “commitment contracts” to meet your financial goals. Retrieved from