4. Spend on Your Best Self
How It Works: To make your money behave the way you want it to, you need to first decide who you are and then make your budget obey that identity. Perplexed? Let us explain.
It can be hard to just “save” blindly or “not spend so much” when you don’t have a larger goal driving you. But if you’re someone who believes that providing for your children is important (like this mom, who says paying for her daughter’s college is her ultimate financial goal), you’ll be a lot more likely to make financial decisions align with your principles.
Accomplishing this is a cinch: In the Money Center, we break down your budget into three essential categories based on the 50/20/30 rule—but you have free will when it comes to creating and naming the folders that describe your saving and spending. So if owning a house is important to you, designate a “dream home” savings folder. If being physically fit is your top priority, christen an exercise savings folder to reflect that goal.
Why It Works: “If we identify ourselves as responsible, and take pride in living up to the virtues associated with that identity, then we activate reward centers in the brain associated with goal achievement,” says Dr. Shefrin.
The other helpful factor: Humans have a desire to see themselves in a certain light, and we’ll reject anything that conflicts with that reality. It’s a phenomenon known as identity reinforcement theory. In other words, you can override bad money behavior by adopting good habits that reflect the person you really want to be.