How To Change Your Financial Habits With Katy Milkman

🔍 Here are the key takeaways and insights from podcast episode of The Rational Reminder Podcast

Photo by Mathieu Stern on Unsplash

🔍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.”

If you want to listen to the whole episode, click here.

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