If You Could Choose to Be Wealthy this Year, Would You?
By Simona Covel
- PUBLISHED December 06
- 4 MINUTE READ
Starting the new year with a vow to save more or spend less is so common that it’s become a cliché. The reality is, if we could keep these promises to ourselves, we wouldn’t find the same ones cropping up year after year.
Why is it so difficult to keep resolutions about ramping up retirement savings or setting spending limits?
Keeping money resolutions is harder than many of us anticipate because changing financial behavior is about much more than transferring funds into your savings account. To make lasting change, we have to understand why we behave the way we do around money: the psychological roadblocks that get in the way of our best intentions. It helps to understand how your brain is hard-wired—and how you can overcome that programming with some simple behavior changes.
A Very Common Problem
Though you’re not likely to hear people admit it, nearly everyone struggles with financial decision-making. The idea that our deeply ingrained biases get in the way of our financial decisions is so powerful that it spawned a discipline called behavioral economics, which studies how people make economic and financial decisions. In recent years, economists and psychologists have used that research to understand how to overcome our inherent biases to make smarter financial moves.
A Nobel Prize-winning behavioral economist found that certain rules held true when people make decisions about money. The biggest discovery was that people aren’t rational actors when it comes to their money. For example, we all tend to value what we have more highly than what we don’t, which is why we’d like to sell our house for more money than we might be willing to pay for it if we weren’t so emotionally invested. In another example, we save and spend differently depending on where the money came from, the size of the check, and whether it’s earmarked for something specific.
Knowing that we’re not rational actors is a huge step toward making the behavior changes that will help us keep those nagging resolutions. Once you realize that making a promise isn’t enough to change—that you have to understand why your money promises don’t always come to fruition—you can figure out how to beat the bias and reach your goal.
Tricking Your Brain
If saving is your goal, you may be able to increase your success by knowing what you’re saving for and siphoning off cash specifically for that goal. In the case of a windfall, like one from an inheritance or bonus, people tend to spend it like fun money. But if you have a separate account for a goal you really want, like a new kitchen or a car or a big vacation, when you see yourself marching closer to that goal each month, you’re more likely to save some of your windfall toward the goal.
Along those same lines, don’t just say you’re going to save more this year. Make sure of it by setting a recurring auto-deposit or auto-transfer. If you can, increase that percentage by a little each month or quarter. Because it’s automatic, you’re more likely to be successful than you would be by simply claiming you’ll save more next month. That’s because no matter what the behavior change is, you’re more likely to do something if there aren’t any obstacles to getting it done.
These ideas may sound basic, but when you apply them to your financial life, they can have huge implications. If you want to ramp up retirement savings, set your contributions to gradually increase over time. If you need to pay down credit card debt, set your bill to autopay the full amount—or as much as you possibly can.
Psychologists note that even an act as small as transferring $1 a day into a savings account may not seem like much, but the repeated action heightens your awareness of saving and makes you see other savings opportunities. In other words, it’s about getting into a savings mindset—a shift that takes time.
Staying in Control
Saving is one side of the equation. But when it comes to controlling spending, exercising self-control is one of the hardest changes people face. Accountability can help. Many people who share finances with a partner may find they think twice if they’ve set a limit for spending without a check-in: For instance, you and your spouse may decide you’ll always run purchases of $300 or more past one another.
Just like learning to more healthfully or go to the gym, financial self-control gets much easier, and more satisfying, the more you do it.
A former Wall Street Journal reporter and Inc. magazine editor, Simona Covel has reported and written on an array of business and financial topics including investing, leveraged finance, business strategy and business planning.