Nudge Yourself to Better Finances

Nudge Yourself to Better Finances

We expect our gym membership to cost money. What we don’t expect is that it will charge us for not working out.

Yes, you read that right.

Gym-Pact is charging clients who skip workouts.

After we got over the shock, we loved this idea—using your pocketbook to prompt yourself to do the right thing.

It exploits our basic psychology: We hate our losses about twice as much as we like our gains, i.e. our distress over losing $500 equals our happiness over winning $1,000.

So, if the promise of rewards isn’t enough to keep you on track with your goals, do you think you would stay the course in order to avoid losses?

Nudging—prompting people to do what is good for them—was made famous in Nudge: Improving Decisions About Health, Wealth, and Happiness by Cass Sunstein. People are using nudging principles to stop smoking or lose weight, such as with this website that charges you for not meeting your goals.

Here’s how you can nudge yourself toward financial health in three big money areas:

1. Retirement

Saving for retirement requires the most nudging. It’s so far in the future, it always feels like you can get to it later. But because your investment is likely to keep increasing more and more over the years (around 7%, historically speaking), postponing saving for retirement is like turning down free money—tens of thousands of dollars of it.

If you haven't opened a 401(k) yet, you're in good company—even Tony Snow, White House press secretary under George W. Bush, couldn’t be bothered to enroll in a 401(k), and so didn’t have any retirement money saved up at the age of 52.

Nowadays, companies have “opt-out” 401(k) plans to help fix this problem. These programs automatically enroll employees, forcing them to opt out instead. Companies that switched to these plans saw participation rates skyrocket from 20% to 90%.

How to Nudge Yourself:

  1. If you’re not enrolled in your 401(k) plan, do it now. Don’t pore over mutual fund prospectuses. Just pick the target-date fund closest to the year of your retirement.
  2. If you get a regular raise every year, mark it on your calendar as a promise to yourself to put more towards retirement, and put that extra towards your 401(k)—do this every year until you hit your maximum.

2. Saving

You’ve heard it again and again: have at least six to nine months of living expenses saved up in an emergency fund. (Here's what we mean when we say that.) But 47% of Americans don't have any emergency fund at all. No wonder—if you’re healthy and employed, an emergency fund is never as enticing as concert tickets, a sleek iPad, or that new handbag you keep passing in the shop window.

How to Nudge Yourself:

  1. Open a savings account at a different bank than the one where you do your checking. Then, set up automatic transfers from your checking account to your new savings account. Time the transfers to your paychecks so the money is gone before you ever even have it. Suddenly, you’ll be saving for emergencies, your upcoming vacation, a down payment and more.

3. Spending

The average American owes $3,752 on his or her credit card. Yikes.

If you feel a little shock every time you see your monthly credit card bill, it might mean you’re digging yourself into a hole. One culprit of your spending excess could be your credit card. One study in Nudge showed that people were willing to fork over twice as much for Boston Celtics tickets if they were paying with credit instead of cash. (If you're looking to dig yourself out of debt, try our Get Out of Debt Bootcamp.)

How to Nudge Yourself:

  1. This one is easy: Use cash. Parting with cash is more painful, and when you run out, you won’t be able to overspend.
  2. If you still find it hard to resist blowing your cash, consider one of these crazy wallets, like the “mother bear,” whose hinge makes it harder to open when your bank balance is low.


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