How to Improve Your Financial Willpower
By RAMIT SETHI
Ramit Sethi runs the Web site I Will Teach You to Be Rich.
One of my friends has been meaning to fax his health insurance company to stop an overcharge worth hundreds of dollars each month. When I asked him why it’s taking so long to fix it, he gave me an astonishing reason: He said he didn’t have a fax machine.
It’d be easy to point and laugh at him for being lazy. But he’s a successful entrepreneur. So why does he find it so hard to motivate himself?
Many of us think we make rational financial decisions. We believe we’re in control. “If I just try harder,” we say, “I could save $100 more each month.”
Yet time and time again, our willpower fails us, and we yo-yo back to our same spending patterns.
So here’s how to turn a few powerful psychological principles in your favor and save more, pay off debt and live a richer life.
Last year, ClimateWire wrote about a fascinating study in behavioral change. Researchers created a workshop on energy efficiency and invited 40 people to attend.
The results: Participants “significantly knew and cared more about the issues after the workshop than before.” But when the researchers looked at attendees’ actions afterward, the results said otherwise. Only eight people installed low-flow shower heads, even though all 40 participants had been given the shower heads at the workshop.
Behavioral change turns out to be extraordinarily hard — even when we believe it’s important and others try to make it easy for us. So we think that if we only try harder we can do anything.
But new psychological research finally acknowledges that willpower is a limited resource. As Stanford psychologist BJ Fogg says, “In the long term, willpower alone won’t work for difficult behaviors. You need to take a different approach, such as changing your environment, removing triggers and taking baby steps.”
This is why people who try to save on everything — coffee, clothes, going out, travel — often fail, while people who focus on one or two areas are able to save dramatically more.
So keeping all of this in mind, what simple psychological changes can you make to change your own behavior, starting immediately?
Start by changing your defaults.
Researchers found that when 401(k) accounts went from “opt-in,” which requires employees to fill out enrollment paperwork, to automatically enrolling employees and requiring them to “opt-out” if they didn’t want to participate, contribution rates soared from less than 40 percent to nearly 100 percent.
If you had asked these employees if their retirement was important to them, 100 percent of them would have said yes. But when you looked at their behavior, these employees were on track to lose tens of thousands of dollars over their lifetimes due to simple inaction. Research has found that educating them would have done very little. But a change in defaults accomplished a lot.
The same approach works for people who try over and over to save a few hundred dollars each month, but things “just keep coming up.” These people blame themselves for their lack of willpower, but never create systems to automate savings.
Defaults are boring. They’re not sexy. But they work.
Here are three other ways to use psychological principles to change your behavior:
1) Automate your personal finances
Most people complain about money for their entire lives, getting hit with late fees, never saving enough and dreading the task of budgeting. Yet it’s possible to spend less than one hour per month on money and still save for future purchases, pay bills automatically and invest every single month. I’ve outlined what you need to do to make it this happen in a 12-minute video.
And here’s a diagram from my book, “I Will Teach You To Be Rich” that shows my automation system:
Ramit Sethi
2. Use your behavior to change your attitude
Many people assume that our attitudes influence behavior, telling ourselves that “I’m frugal, so I don’t buy expensive jeans.” But in psychological research, behavioral change works in reverse, too. Your behaviors can actually affect your attitudes and emotions. For example, researchers have found that if you nod your head when listening to a persuasive message, you’re more likely to be persuaded.
How can we use this to our advantage?
Identify one thing you want to do more of (say, read a fiction book). Now, instead of waiting for some day when you’ll actually do it, add a calendar reminder every week for a month. After that, ask yourself if you still need that calendar reminder.
3. Stop trying to save on everything.
Every morning we wake up facing infinite financial possibilities. Should we pay down debt? Buy that latte? Eat out with friends?
Overwhelmed with choices, we do the same thing we always do: nothing.
Instead of trying to save a little bit on everything, focus on your two biggest discretionary expenses. For example, my two biggest discretionary expenses are eating out and drinking. Over the next six months, cut each down by 25 to 33 percent.
Courtesy of Ramit Sethi
So willpower matters, but you can set up all sorts of systems to overcome its ill effects.
What psychological techniques have you deployed to change your own behavior?
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