Four ways to design your environment to change your financial behavior

If you want to change how you spend your money, there are two main ways to do it:

  • you can change your environment, like changing your incentives or
  • you can change yourself, like building new habits.

In previous posts, I’ve talked about small tweaks my wife and I have made to change our spending behavior, and about some of behavioral challenges that arose as we did it.   Now, I want to dig deeper, and talk about the core theory – what does it take to change behavior?

I’ll start with changing the environment. 

There’s a mess of advice out there on how to take control of one’s finances, from good old Ben Franklin to Dave Ramsey.   Some of it is excellent and insightful (like both Ben and Dave), and some of it is kooky wishful thinking.  The best, and empirically proven, work out there is by social psychologists like BJ Fogg and Behavioral Economists like Richard Thaler.   I’ve drawn on that research, especially  Fogg’s behavioral model, the persuasive design discipline he helped start (see Dan Lockton’s Design with Intent, for example), and behavioral economics work on Choice Architecture and behavioral nudges.   

I’ve found that there are four core techniques: Motivate, Facilitate, Trigger, and Automate.   Let’s say you have a target – saving money for a house – that you want to encourage.  You’re afraid you’ll blow the money on something sooner and not have enough for the down payment.  Here’s how each technique works:

  • Motivate.  Set up incentives (punishments and rewards) to encourage the action.  The incentive can be monetary (cash, taxes and penalties), or to something more personal (love, disapproval, etc.)[1].   For example, each time you put aside $ for the house, you and your spouse can celebrate.  A clever way to self-motivate is ‘commitment contracts’ where you put your $ or reputation on the line if you fail to save, like with       
  • Facilitate.  In addition to making it profitable or pleasant to act (motivation), you can also make the action easier – by breaking the big task into smaller pieces, and by reducing the difficulty (perceived or real) of each piece.[2]    For example, to save for a house, break the saving process down into the amount you should save with each paycheck (don’t think about the full down-payment; that increase the perceived difficulty), then get a mobile phone app from your bank that allows you to quickly and easily transfer the money each time you’re paid. 
  • Trigger.  For many behaviors, the motivation is always there, but something needs to trigger you to act NOW rather than later.  These triggers, wisely placed, can overcome procrastination and the lack of sustained attention to our finances that we all suffer.  For example, setup a reminder to contribute to your house savings on the 1st and 15th of every month.  Or, even better, setup a notification on your phone on those days with a link to the mobile app to actually transfer the money.   Timing  is key.   If you wait until the end of each pay period, you may have unthinkingly spent the money you’d planned to save.   Pay yourself first.
  • Automate.  Sometimes, the best way to change your behavior is to make sure you don’t need to do it at all.   What’s the most effective way to consistently save for a house?  Setup an automatic transfer (or paycheck deduction) so that the money is automatically deducted with each paycheck.    

These techniques work for individuals changing their own behavior, as well as for companies and NGOs seeking to help others take action – like HelloWallet.   In the retirement space, for example, the combination of default enrollment (a powerful version of facilitation) and automated contributions have revolutionized 401(k) contributions, helping millions of people better prepare for retirement.    

There’s an immense amount that one can talk about on each of these techniques. But, this is already a lot to digest (and type 😉 ) for one blog post.   Next week, I’ll talk about how you can “change yourself” in order to shape your behavior. 






[1] Motivation is a massive topic, with good work on social rewards (think gamification),  intrinsic rewards (think personal satisfaction), economic rewards, and countless other options. I’ll get into those details, and some the additional depth behind the other three techniques, in later posts.

[2] Yes, this could be called “changing the incentives”, like in #1. We’re not trying to be purists here, we’re just trying to be clear. Facilitation is more subtle than motivation, and gets its own category.

(Photo by Tax Credits)