Last week, I talked about how you can cleverly structure your environment to make it easier to control your finances. Here, I’ll talk about how to prepare yourself – consciously, methodically, lay the foundation to make yourself more successful at your financial goals. It’s life hacking for your finances.
From the research literature and our work at HelloWallet, there are four main techniques, each targeting a different part of your thinking:
- Inform yourself – prepare your rational mind for the task ahead
- Guide your intuition – teach your gut to respond wisely to spending decisions
- Build a habit – learn a new routine so neither rational thought or intuition is needed
- Write your own story – make financial action part of who you are, so you naturally act accordingly
These techniques are best illustrated with an example. Let’s say you want to pay off a debt. Maybe you have a big car loan, credit card debt, or a pile of student loans. You’ve set a goal – pay off $20,000 in two years. Now, how do you make it happen?
Inform Yourself. To pay off a $20k debt, you could start gathering the information you need and making a plan. For example, you could calculate how much you need to pay per month, and make a concrete plan on how you’d scrounge up the money. You could increase your motivation by calculating how much money you’ll save in interest. These are all examples of “informing yourself”, and there are numerous tools online to help with this process; Bankrate has some examples. Check out researchers such as Annamaria Lusardi and Olivia Mitchell to learn more about the importance of financial information and financial literacy generally.
Guide your intuition. “Informing yourself” works best with conscious spending decisions. But, while some financial choices are conscious and rational, much of our daily spending behavior isn’t; we buy (or save) based on whether it feels right. That intuitive behavior can derail your conscious, rational, debt-repayment plan, though. So, what does “intuition” mean? There’s a huge literature in psychology and neuroscience that speaks to this question, but, in short: our intuition is a mix of years of experience with the emotions we associate with it. For example, I would be tempted to buy a swank pair of boots, in part, because of all the people I’ve seen with those boots and the emotion I expect I’ll feel when I wear them.
How can you make your intuition work in your favor, though? First, you can short-circuit “bad” intuitive reactions by being consciously aware of them; if you know why you want to buy boots that’ll blow your budget, you can (more easily) stop yourself. Second, you can work hard to associate your financial success with good stuff – don’t think about debts repayment as saving interest (boring, not every intuitive); think about it in terms of the vacation you’ll take. Think about it in terms of the pride you’ll feel at being free.
Build a Habit. Intuition is only part of the picture, though. Sometimes our behavior is habitual and done without really thinking about it. For example, see the coffee shop on your way to work, and automatically turn to get that to morning rush of caffeine, that’s a habit. Habits run off of triggers and rewards – people learn to respond automatically to the sight, smell, or sound of something, knowing there will be some reward if they do it. There’s recently been innovative work on how habits work by BJ Fogg and Nir Eyal. Charles Duhigg provides a great overview.
Existing spending habits can certainly interfere with a well-intentioned plan to pay off a debt. But, how can habits work in your favor? It’s a huge topic, and one I’ll talk about in future posts. But, in short, you can build a habit of putting aside money to repay your debts, by carefully picking the triggers and rewards. You can also try to limit your current spending habits that would derail your plan; again, something for a later discussion.
Write your Own Story. How we think of ourselves and how we interpret our own behavior matters. For example, do you think of yourself as a good parent? As a saver? It may sound like wishful thinking, but there’s solid experimental research on how our self-narrative subtly shapes our behavior over time. People that think of themselves as savers are much more likely to use a tax refund for saving, than those that don’t (yes, even after controlling for everything else that might be different). Tim Wilson’s recent book provides a great overview, but there’s a long tradition in social psychology to back him up.
How do you make this work in your favor? If you are paying off a big debt, make it part of your story. You’re a saver. You’re getting free. Think about the successes (small as they may be) that you’ve had so far in saving money, and use that to think big. Yes, it sounds a bit kooky – but give it a shot.
That’s it for now. Next week I’ll talk about how to creatively structure the action you plan to take (paying off debt), to make it more feasible. I’ll also talk about how to pull it all together into a plan that you can realistically execute – 1) structure the environment, 2) prepare yourself, and 3) design the action itself.
What do you think? Have you tried out any of these strategies? What else have you done to take control of your finances?