If you’ve ever experienced a sense of euphoria after paying off your credit card in full or purchasing a piece of furniture that finally completes your living room, you know that our relationship to money isn’t just a purely economical one.
There's a big psychological component, too.
And this is exactly why a growing number of scholars these days are studying behavioral psychology and economics—in tandem.
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The reason: They want to figure out how to best capitalize on our emotions—the pride we feel when a savings account balance grows or the panic that ensues when a hefty bill arrives in the mail—in order to help us adopt more productive money habits.
Scholars like Jonathan Zinman, Hersh Shefrin and Julie Agnew—all luminaries in the field of finance-related behavior change techniques. And the very kind of people whose brains we love to pick for advice on how to work toward kicking unproductive habits—say, like a never-ending cycle of overspending—in order to get on the right financial track.
Each one of them has a unique perspective to share, so read on and you may just glean a good money habit or two.
His Philosophy Quick: Think of all the excuses you’ve given yourself over the years for ignoring your budget—against your better judgement—so you could indulge in a frivolous purchase.
You probably have quite a few, right?
Well, Zinman, 42, an economics professor at Dartmouth College, says you can essentially boil your behavior down to just two bad habits.
“One is a self-control problem, or the ‘carpe diem’ problem, where people are forever living for today, with the intention of being more patient and forward-looking ... starting tomorrow,” Zinman says.
“The second is limited attention," he adds. "If people are distracted by what's in their face today—whether it's putting out fires, such as replacing a broken refrigerator, or opportunities for fun—then planning or saving for tomorrow may not resonate.”
How to Overhaul the Habit Traditionally, the financial industry has tried to foster a higher level of money-savvy through things like consumer education initiatives and disclosing fine-print details on credit card agreements.
But Zinman argues that these approaches aren’t terribly helpful in practice: Financial education often doesn’t reach those who need it most. And it’s all too easy to avoid reading up on how high your interest rates are if you've already made up your mind to swipe that credit card.
The campaign, in which employers automatically enrolled workers in retirement savings program—requiring them to opt-out rather than opt-in—is a win for behavior-change scholars who tout the benefits of automation.
A more promising solution to fight the urge for instant gratification? Take advantage of technology to keep you in check.
“More and more financial service providers are offering simple tools for tracking and controlling spending with alerts, customizable spending limits and the like,” Zinman says. Some credit card companies will even send you an alert each time you use your card—reminding you how much you've spent so far, and how much closer today's purchase will get you to your limit for the month.
Utilizing technology can work for people in the second camp, too. “In terms of dealing with the limited attention problem, automation can help—like putting your savings on auto-pilot, for instance,” Zinman says. If you automate deposits into a savings or retirement account each month, you can simply set it and forget it—guaranteeing that you make progress on your goals.
The Power of Proof Zinman says the successful "Save More Tomorrow" campaign, in which employers automatically enrolled workers in retirement savings program—requiring them to opt-out rather than opt-in—is a significant win for behavior-change scholars who tout the benefits of automation. For employees who participated in the program, savings rates increased from 3% to 11% over the course of just 28 months.
The Expert: Hersh Shefrin
His Philosophy Let's say that, this year, you've decided that you want to max out your Roth IRA contributions ... and remodel your kitchen.
So which goal do you think will win out?
Unfortunately, it’s not uncommon for someone to prioritize the home improvement project—possibly even landing themselves in debt, while also not upping their retirement contributions. So what's causing us to overspend or postpone saving, even when we want to do the right thing?
Shefrin, a well-known economist and author of "Behavioral Corporate Finance," says it’s usually because only part of the human brain wishes to discontinue an unhealthy behavior pattern—while the other part often doesn't.
“It’s a bit like having both a parent and a screaming kid living in our heads, with the parent giving in just to get the kid to quiet down for a while," explains Shefrin, 66. "Overspending is effectively giving in to our urge for immediate consumption—it fills a clear and present need for a dopamine fix.”
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If you're prone to impulse purchases, one way to trick yourself into being more thoughtful with your money is to develop the habit of paying only in cash.
How to Overhaul the Habit One of the best ways to break problematic old behavior patterns is to trick yourself into changing them, Shefrin says. “Continually fighting urges head-on is usually a losing battle for the thinking part of the brain,” he explains. “Emotional urges don't respond to logic all that well.”
So if you're someone who's particularly prone to impulse purchases, one way to trick yourself into being more thoughtful with your money is to develop the habit of paying only in cash—and avoid keeping any small denominations in your wallet or purse.
This way, you have to deliberately ponder whether or not to break a large bill each time you're at the register, which will hopefully translate into more meaningful buys and fewer frivolous ones.
“This works because it finesses the miscalibrated and unsophisticated 'urge,' rather than fighting it,” Shefrin says.
The Power of Proof Shefrin points to a 2009 study published in the Journal of Consumer Research that backs up his theory about the power of using only small bills. In the study, researchers found that people are less likely to spend money when using a larger denomination, like a $20 bill, than if they had 20 $1 bills. Why? To participants, it seemed like larger bills would be harder to replace than smaller ones.
The Expert: Julie Agnew
Her Philosophy According to Agnew, Associate Professor of Finance and Economics at the College of William & Mary's business school, when it comes to detrimental financial habits, there's one major culprit: procrastination.
It's what researchers attribute low enrollment rates in voluntary retirement savings plans to—and it could very well also be the reason why few people create a budget or start saving a portion of their paychecks early in their careers.
One driving factor? Agnew, 45, suggests that it's rooted in a tendency to misestimate the time it takes to complete a task. In other words, if a person runs out of time she originally allotted to creating her budget—she may never return later to finish it at all.
But for those who do take the time to set financial goals, Agnew says a few different mindsets—like being distracted, inattentive or unable to focus—can also trip them up.
“For most people, financial decisions are complicated, and interest is low," she says. "So it's not surprising that these decisions are not always a top priority, even though they have significant consequences.”
If you're trying to pay off a credit card, creating target deadlines—say, paying off a third of the full amount each quarter—makes the goal feel less overwhelming than tackling the entire balance.
How to Overhaul the Habit To overcome procrastination tendencies, Agnew recommends breaking a given financial task into achievable parts and setting specific benchmarks for yourself.
So if you're trying to pay off a credit card balance, creating target deadlines—say, paying off a third of the full amount each quarter—makes the goal feel less overwhelming than if you tried tackling the entire balance at once.
And for any lingering procrastination urges you may still have, Agnew says constantly reminding yourself of your goal is crucial. She suggests using electronic calendar reminders to prompt you to prioritize paying a bill or rebalancing your investments when those above-mentioned mindset distractions get in the way. (Try it out with ones like OhDontForget or TextMemos.)
The Power of Proof A group of researchers who conducted experiments designed to increase savings in Bolivia, Peru and the Philippines found that reminders like the ones Agnew suggests are extremely effective in helping to change financial behaviors.
In the study, they discovered that individuals randomly assigned to receive either monthly reminders via text or a letter in the mail saved 6% more than those in the non-reminder group.
And, according to Agnew, in another experiment with a micro-lender in Uganda, on-time loan repayments significantly increased with monthly text message reminders—further proof that even a little nudge can go a long way toward building better money habits.