You probably have a list of resolutions or goals that you want to reach in the new year. As you start working your list and signing up for gym memberships, it’s important to understand how you can nudge yourself to turn your goals into better decisions. It’s also important to understand why I used the word nudge. It wasn’t just one of those, “I need a fancy word, help me thesaurus!” moments.
Nudge: Improving Decisions about Health, Wealth & Happiness is the name of a book by Richard Thaler & Cass Sunstein that utilizes research in behavioral economics to illuminate the fact that we often make irrational decisions (particularly when it comes to our finances) and how we might overcome this tendency. Their book focuses primarily on ways that government, companies & nonprofits might develop programs to nudge people to make the right decisions. However, today, I want to address some ways you can nudge yourself.
First, what’s Behavioral Economics? The words sound complicated but essentially, it’s the study of how we make economic or financial decisions. Traditionally, economists assume that people always make rational decisions. You and I both know that’s not always true, if it was I wouldn’t have seven boxes of Girl Scout cookies in my freezer. Behavioral economics tries to figure out why we sometimes make these irrational decisions.
Second, what did those behavioral economists figure out? Here are three of the most common reasons we act irrationally:
- Incomplete information: This one’s pretty simple; we don’t always make the best decisions because we don’t always have all the information we need.
- Status quo bias: Change is scary so we tend to make choices that ensure things stay the same or change only slightly even if they aren’t the best choices.
- Present-minded bias: Turns out, we don’t really know our future selves as well as we think we do. Consequently, we make promises to ourselves today that aren’t as easy to follow through with two weeks later (or even tomorrow).
Third, and most importantly, what can you do about it? Below are my suggestions for nudging yourself to make sound financial decisions in 2015:
- Do your research. Before making any financial decision, shop around; talk to friends; Google it. This will not only help you gain more complete information, but also give you time to decide if the purchase is something you really want or need. Acting on impulse is a sure way to make poor financial decisions.
- Schedule a time to review your budget. When distractions are low, grab a cup of tea, put on some soothing music and start reviewing. The key is to be relaxed & focused when making financial decisions. Take particular note of anything you have been paying on a consistent basis for over a year. Do you still need that storage unit or is it time to sell some things? Are you utilizing all the features on your cable, internet, & phone plans or can you make cuts? Do you still read your newspaper every day? Resolve to make some changes.
- Set up your own defaults. “Defaults have immense power in a world of busy people. Limits on time, information and energy often mean that people will end up with whatever default option is given to them, whether or not it is the best option,” say Thaler and Sunstein in their book. Make one decision now that eliminates many difficult decisions in the future. Here are a few ideas to get you started:
- Set up automatic savings. Choose a certain amount of your paycheck to be automatically transferred to your savings account each payday. Most banks will do this free of charge. This is the practice of paying yourself first.
- Automate your bills. Have utility bills automatically deducted from your bank account each month. They have to be paid and this way you can be sure to avoid any late fees.
- Remind yourself. Utilize reminders on your smartphone to remind you of periodic expenses such as car registrations or school tuition expenses. It’s best to set a reminder about a month in advance so you can be sure to have the money set aside.
We know that change is not easy, especially when our personal finances are concerned. So, try taking some of these steps to nudge you towards success.