How to kick your bad money habits by retraining your brain
Creating new habits is hard. Our human nature loves to maintain the status quo, and sees small change as energy sapping and frustrating.
Plus, when we attempt to build good financial habits, such as cutting back on discretionary spending, we face a fight against the emotional pain of loss that these cutbacks bring.
My emotional side says, "I like having my coffee each morning from the barista who remembers my name", "I deserve that expensive meal out", "I need credit to get new things that I can't afford and pay off later". In order to gain better habits you often need to lose the old feelgood ones.
This internal struggle of loss versus gain feels like a battle between freedom and restraint.
"You can take our lives, but you can never take our freedom" I can hear our reactive nature screaming.
The good news is that if we can create good habits, the same status quo mechanism that hates change kicks in to keep our good financial behaviours going strong. The challenge, then, is how we transition good financial behaviours from tasks we constantly think about into more automatic habitual behaviours.
Fortunately, behavioural economics gives us some insight into how we might attempt to do this. Here are three psychological "power tools" you can use to help create better behaviours - use simple rules, nudge yourself and be socially accountable.
Firstly, using simple rules is powerful, particularly when it comes to the emotionally charged topic of money. For instance, my wife and I talk about any expense over $200, we save or invest at least 20% of our income regardless of our earnings, and we never sell shares simply based on their past performance.
These simple rules are excellent for removing emotion out of good decision making. If the rule doesn't work well, you can always adjust accordingly. This reduces cognitive load and helps you increase the clarity and confidence of your decisions.
Secondly, use the power of nudges to help point you in the right direction. Nudges are simple and obvious things in your physical environment that help remind you of desired behaviours. Setting up a calendar reminder at the same time each month to reconcile accounts is a nudge.
Splitting your money into separate sub-accounts and naming them according to how the money should be spent (utilities, entertainment, school fees etc.) is a nudge. Setting the password on your bank account log-in to remind you of a big savings goal ... you guessed it ... is a nudge. You're allowing your environment to do the thinking for you, saving time and mental energy in the process.
Finally, use social pressure to hold you accountable. Talk to your partner about desired spending habits and goals, and get them to hold you to account. Create a chat group with like-minded and trusted people to share wealth targets and investment plans.
Have a "savings thermometer" on the fridge so the family can see how much you've put aside for a family holiday. These things work because when you deviate from the plan, you need to explain your behaviour to others.
Our brains are amazing - harnessing our mind's own power tools to improve our decisions and create better habits just makes sense (yes, pun intended).
Three psychological power tools for better financial habits
1. Simple rules
Setting up simple decision-making rules makes dealing with money less emotional and more systematic. This also means that when things don't go well you can blame the rule (and refine it) rather than feeling as if you have to defend your own judgement. Less emotion, better behaviours - it's a win-win!
2. Nudge yourself
Put little nudges in your environment, such as calendar reminders or account-naming conventions, to help guide your attention to what matters most. Why do the thinking when you can set up your environment to help do
it for you?
3. Tell others
Make commitments to others you trust, and get them to hold you accountable. Social group dynamics and expectations are extremely influential, so get your tribe to help keep you on track and form better financial habits.