Behavioural Hurdles: What we’re wired to do
Episode #6 of the course Financial wellbeing: How to worry less about money by Maureen McGuinness
Benjamin Franklin once said, “A penny saved is a penny earned.” He said this in the 1700s. Personal finance advice has been readily available for hundreds of years, yet many of us today struggle to put advice into action. Advice alone is not enough. We need to educate ourselves on other factors that hold us back with our personal finances.
A study in 2015, looked at the impact of financial education on an individual’s financial capability–the ability to apply that financial education to the management of their own money. Working closely with charities that promote financial education and debt management charities, the research found that financial education is just one element of increasing our financial capability. In the paper, the researchers argue that there are other factors that influence our financial capability called behavioral hurdles.
Since the central argument is that we aren’t wired to be good with money, to become truly capable at managing our personal finances, we must anticipate and manage our behavioral hurdles.
When you have a lot on your mind, it’s more challenging to make a decision that will be most lucrative. If you’re overwhelmed, you’re more likely to take the simplest option.
Example: Selecting a savings account. It may be easiest to go with the same bank that provides you with your checking account, but they may offer a less competitive interest rate than other providers.
How to overcome cognitive overload:
1. Reduce the number of decisions you make
You can do this by scrutinizing your routine and automating daily tasks. Can you lay out your clothes the night before instead of the morning? Can you prepare your lunch the evening before? Making decisions uses up mental resources. Reducing the number of decisions you need to make on a daily basis will help you free up mental energy to make a better decision about your finances, such as finding the most competitive savings account
2. Focus on one action
Instead of trying to create a budget, reduce spending, and start saving all at once, focus on one action you can take today to improve your financial wellbeing. It could be my earlier suggestion of tracking what you spend. That way you won’t be overwhelmed by lots of new activities, and you’ll be more likely to stay the course.
We often make decisions when we are in a neutral state, and we overlook how we might behave differently in the heat of the moment.
Example: Going to the supermarket on an empty stomach.
How to overcome empathy gaps:
1. Purchase groceries when you are full
I purchase groceries twice per week. After dinner on Wednesdays and after breakfast on Saturdays. I rarely buy anything that I haven’t planned before heading to the supermarket, which is easy to do when I’m not hungry and less tempted by the smells and colors on display.
2. Go to the supermarket with a list
Using a list is a way to stay accountable to my meal plan. You don’t have to plan every meal for the week, but having a good idea of what you’re going to eat for the next few days helps reduce waste and decreases the chances of overeating. Going with a list prevents impulse purchases. When I find I want something that’s not on my list, I add it to my list for the next trip.
“The Millionaire Next Door” by Thomas J. Stanley & William D. Danko
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