Is it time you adopted a Do Something Different approach to your finances? As I’ve often said here, we’re all creatures of habit at heart and that seeps into our financial behavior as well as our personality. For example, research shows that people stay loyal to the same bank for life when they’d be better off switching; they make the same financial mistakes repeatedly and base financial decisions on emotion instead of reason. Many of us shop out of habit and even use shopping as an emotional regulator.
We humans are not the rational decision makers we think we are. This is also true when money is concerned.
Experiments with the Ultimatum Game — where people are asked to share out money that they can only keep if both parties agree with the split suggested - show that people will refuse free money if they think the other player is making more than they ‘should’. If you were offered a free $1 you are likely to turn it down — if you knew the other person was going to keep $9 out of the $10 bill.
One explanation for this ‘irrationality’ is based on the idea that people don’t do the right thing economically because they take a moral view of what others ‘should’ do. It sounds good — we are keen to ensure that the right things happen so that they world is a moral place. However, research just published by Lars Hall and colleagues in Sweden, shows that people’s morals and rational explanations don’t mix well. They asked people about a series of key moral issues and then — using a magic technique to present them with the opposite of their expressed view — showed that 69 percent of the people failed to even notice they were being asked to defend the exact opposite of what they had just said they believed in. They just carried on justifying the opposite moral stance. It seems we can be morally blind as well as monetarily silly.
Why is this? I’ve argued that at least 90 percent of what we do and think every day is a repetition of what we’ve done before. That is why we are blind to options and chances and also why we fail to notice things that so obviously contradict our position. So when it comes to managing our money we resort to what we know, we become blind to what we are doing, we become inert rather than dynamic and we often fail to make the right choices at the right time. This is largely because the brain operates on an efficiency principle. Why waste precious energy, it says, forcing new decisions and inventing new ways of doing things? Might as well bring out the old ones that we know and like. We miss the best offers because we are psychologically blind to them. No wonder that people leave funds festering in accounts with paltry rates of interests. Or stay loyal to financial providers who offer a poor return or whose customer service leaves a lot to be desired. And habits and inertia can also explain why people fail to make adequate provision for their financial future. They know they should, they just haven’t gotten round to it.
Our money habits and attitudes will have become ingrained over years and years. Some will have been passed on by our parents or our social context. There will be areas of finance with which we’re comfortable (maybe managing the family budget or settling bills on time). Then, lurking deeper, those that are outside our comfort zone (perhaps dealing with taxation or pension issues). The ones we’d rather not think about. Or would rather leave to someone else.
Doing Something Different is a way of dipping a toe into the discomfort zone of your finances. That’s why, in the book Sheconomics, written by my wife Professor Karen Pine, you’ll find lots of exercises to break bad financial habits and urge you to do something different.
Here are just a few:
- Scared or intimidated by financial jargon?
Do Something Different and look at a financial website for just 10 minutes every day. Try one that that demystifies the world of finance and makes it easy to understand. Or make a habit of flicking through the financial pages of the weekend papers. Get comfortable with money talk and money facts. It's not rocket science, honest.
- Held back by a contempt for money or feeling you don’t deserve it?
Do Something Different and go somewhere that feels out of your league. Maybe have a coffee in a posh hotel, tell yourself you've every right to it. Test drive a top-of-the-range car and see how it feels.
- Head-in-the-sand and then hit by big expenses?
Do Something Different and divert a sum via direct debit every month into an emergency fund. Folk who are financially savvy have at least enough stashed away to cover three month's living expenses. Then if a job-loss or big expense hits, there's less chance you'll dive into debt to deal with it.
- Trapped by salary creep (earn more-spend more)
Do Something Different and pretend you didn’t get your next pay rise- divert the difference into a savings account. Use the human habitual tendency to your advantage and automate savings and funds. You won't miss what you haven't had and it'll grow without you doing anything.
- Living for today and ignoring the future?
Do Something Different and get a current value on what your pension will bring you. That's all, just call up your provider and ask for the estimated annual amount payable. Divide it by 52. Then try living on that amount for a week. How does it feel? When you've recovered from the shock go and talk to an expert about how you can boost your pension.
- Overwhelmed by the financial tasks left untackled?
Do Something Different and organise your paperwork into neat orderly files. You’ll find you start feeling in control immediately. Those big problems won't seem anywhere near as overwhelming.
I would suggest at least two reasons for trying some of these things (or your own financial Do Something Different examples). The first is purely practical — they will help you to get yourself more sorted out financially speaking. That might help you feel better about yourself too. The second reason is that it might give you a new look at other areas of your life where you could do things differently for your wider benefit too. Breaking out of the vice-like grip of behavioral habits in one area often gives you the chance to see things from a fresh perspective in other areas too.
Whenever you're feeling stuck or that you're not getting what you want from life, just ask yourself 'What do I usually do?' Then try doing something different. It's crazy to keep doing the same thing and expecting a different result. To get something different you have to Do Something Different. That applies to your financial behavior as well as to other areas of your life, like health, relationships or work.
One Do at a time is a good maxim to keep in our behavioral repertoire! In my view it is more powerful than keeping one thought in your mind. (See my other blogs for an explanation.)