How To Change Your Financial Habits With Katy Milkman
🔍 Here are the key takeaways and insights from podcast episode of The Rational Reminder Podcast
🔍The Concept Behind Fresh Start
- Fresh starts make you motivated. You give your old self a clean slate and start making a new plan for your future self.
- It gives you a feeling of a new beginning, like new year resolutions or goal settings.
- Study shows that 20% to 30% more people signed up for 401(K) when they asked to join after a fresh start date like after their birthdays or spring.
🔍Long Term Benefits vs. Short Term Satisfaction
- Our brains are wired to overvalue instant satisfaction and give discounts to long-term benefits.
- Plan short-term satisfaction during the course of long-term goal.
- Enjoy the small winnings to persist in the long-term planning.
“If it’s not fun, we don’t tend to persist.”
🔍Commitment Devices
- Bank in the Philippines offered saving accounts but with some sort of locking mechanism referred to as Commitment Devices.
- People are not allowed to take out money until a predetermined date or saving amount.
- In a trial experiment, half of the people were asked to select either a locked account or a standard account.
- 30% of the population choose the locked mechanism account so that they can bind their hands when tempted to dip in their savings and spend it.
- What this trial found that average savings were 80% higher for the group in which 30% of people adopted for locked mechanism account.
🔍Implementing Commitment Devices
- Only a few of us recognize the need for constraints to stay away from savings.
- Opening a second bank account and then chopping up the debit card associated with that account. Or forgetting the password.
- Stuffing some of the money aside and never checking it and just letting it grow.
- So when there is a temptation to spend some savings, it will be harder to dip in.
🔍Cash Commitment Devices
- A cash commitment device involves putting some money on the line.
- And if you don’t achieve your specific goal, you will forfeit that amount.
- With this, you are increasing the price of your vice.
🔍Setting Up Big, Ambitious Goals
- Big, ambitious goals give enough motivation to achieve the goal.
- Too much of a stretchy goal may make you demotivated.
- Break up your big goals into smaller ones.
🔍Remembering The Commitment
- We are not very good at remembering our commitments. And we undervalue the importance of reminders.
- In the financial domain, we can take the benefit of autopilot. Like, an automatic deduction for savings from the paycheck.
- With autopilot, we can unburden our brain with some of the repetitive financial decisions.
🔍Laziness May Be Helpful
- By default, we are lazy. We want to achieve an outcome with the least amount of energy.
- In the financial domain, laziness can become an asset.
- Like setting up an auto deduction from a paycheck. And never changing that decision out of laziness.
🔍Avoid Checking The Portfolio
- Most of us are like monkeys throwing the darts. We don’t know how to pick stocks.
- The more frequently we check our portfolio, the more we trade and the more we burn money.
- So laziness can be helpful here.
🔍Habit Formation
- Habit formation is one of the most important parts of behavior change.
- The study shows the benefits of adding flexibility to the routine when forming habits.
- People with a fixed schedule for their routines are more likely to miss their routine when life throws some urgency to them. As compared to people who have a flexible schedule.
- Breaking a bad financial habit might be easy if you put a hurdle in a way between the cue and trigger of your specific bad financial habit.
🔍Under Confidence Is Also An Issue
- People underestimate themselves when they want to achieve goals.
- So they don’t take action and even don’t try.
- The confidence level can be increased by putting people in a place where they have to make decisions.
🔍The Importance Of Keeping A Good Company
- Study shows that roommates, randomly assigned to students in colleges, affect college grades.
- You do better when you end up with a roommate who performs better.
“We are tremendously influenced by the people around us.”
- If everyone around you is saving, you are likely to want to save money.
“So you can be deliberate in shaping your social circle in a way that will help encourage the kind of person you want to become.”
🔍Behavior Changes Are Not Permanent
- People often think that if they stick to a particular behavior for a month, it will magically propel itself forward.
- Our impulses or desire to procrastinate never go away.
“We just need to develop strategies we can use consistently over time to overcome those challenges.”