Financial willpower - three ways to find it, one great way to keep it


We’re well into the New Year and those ambitious promises you made only a few weeks ago may well be fading. I’m noticing the gym is getting less crowded as the January weight-loss and fitness resolution-ers lose their, um, resolve. (More room for me, I say).

But if your 2011 financial goals are also falling by the wayside, I urge you to get back on track. Here I offer three ways to find the financial willpower you need to achieve your 2011 goals.

First, though, let’s all just acknowledge how hard it is to change — even though so many of us hope to improve our spending and saving habits. Financial resolutions landed third on the list of New Year’s goals this year, behind kicking cigarettes and losing weight, according to a poll by the Marist College Institute for Public Opinion. And 41 percent of Gen Y-ers say they plan to “reduce spending and increase savings,” according to the Money Mindset Index from Western Union.

With so many good intentions on the table, why is it that the vast majority of consumers are back to their old spending habits by the end of the year? Nearly 9 out of 10 resolutions end in dismal failure, according to one 2007 survey. (Here’s how one Bundler did with her financial resolutions last year — a decidedly mixed bag).

Is it impossible to change?

Not impossible, behavioral scientists say. But we usually go about it in all the wrong ways. For one thing, we often make multiple goals at once, or we aim to achieve huge things — working out for an hour a day after months of inactivity, for instance, or vowing to contribute $10,000 this year to our child’s 529. “We as humans tend to be lazy,” says BJ Fogg, Ph.D., director of Stanford University’s Persuasive Technology Lab. “We only make the smallest effort in order to achieve a certain goal.” In other words, there’s only so much behavioral change we can manage at one time.

“Every year, I see the same things, and nobody listens after the first 10 days in January,” says Ramit Sethi, author of I Will Teach You to Be Rich. “It is incredibly difficult to change behavior, and yet we’ve been taught that if we just try harder, we can save that $100 a month, we can lose those last 10 pounds, and we can get our house clean. In reality, if we look at ourselves and honestly examine the last six, 12 months, we will almost always realize that willpower doesn’t work.”

So what does? Here are three ways you can change your financial behavior for the long-term:

Change the physical or social context. If you want to eat more veggies but your pantry is still filled with snacks, you’re probably going to eat more Sun Chips than squash. Change the context of your kitchen, however — leave baby carrots and bell pepper strips on the front shelf of your fridge, for instance — and you’ve got a better chance at eating right. Similarly, if you’re trying to save money but you’re hanging out with people who drop cash at every opportunity, it’s going to be tough to hang on to your thrifty willpower. (Unless you’re this Bundler, who saves more because he knows what his friends spend.) Changing the context may mean spending time with more frugal-minded pals, or going out without your credit cards to remove the temptation to spend extra. “Context change can be hard to do, because it means changing some of the structure around you,” Fogg says. “But it’s really powerful.”

Take baby steps. “You’ve got to pick a small behavior and make that into a habit,” Fogg says. “That’s in contrast to, ‘Oh, here’s this whole new me, I’m going to change myself in 30 huge ways.’ Dramatic changes don’t work.” The exception to this rule might be something like, say, “The Biggest Loser,” in which contestants’ contexts are completely reworked and they’re forced to make big changes. But most people don’t have access to that kind of regime. So the most successful way to make saving a habit would be to set aside a very small amount each week — something easy, something achievable. When that works, you can boost the amount you’re saving, but the important part is establishing the behavior, and that takes baby steps.

Have an epiphany. Have you ever had a life-changing moment? (And no, I’m not talking about the first time you watched “Jersey Shore.”) One person might stop smoking after a close relative dies of lung cancer. Another might decide to eat healthier fare after she finds out that she’s pregnant. “It’s different after that moment,” Fogg says. “After that, you will make changes. You see the world differently.” Unfortunately, there’s no way to manufacture an epiphany. (Let us know if you figure that one out.) But if you experience one in your financial life, make the most of it. You’ve got a much better chance of making your behavior stick.

So how does all this work when it comes to money? Simple. Make it easy on yourself. Don’t try to make drastic changes all at once. Decide to brown bag your lunch, as this Bundler did, instead of resolving to just “save money.” And change your money context when you can, such as putting your credit cards in a drawer for a few months, or declining invites from your cash-flush friends.

Or, Sethi says, put your financial life on auto-pilot. “One of the most effective ways to change your behavior is to automate it,” he says. “Set the defaults so that you’re automatically doing the right thing. That way, you don’t have to depend on your limited willpower.”

For example, he says, most of us know that we should be saving money for larger purchases down the road. In roughly 11 months, many of us will be Christmas shopping again while staring in panic at our meager bank balances. But if you know how much you plan to spend in December, you can prepare for it now. Just divide that amount by 11 (since it’s almost February) and have the money automatically transferred from your checking account into savings once a month. Done. No brain power required. “We have limited willpower, limited attention,” Sethi says. “If you automate, you save your limited attention and willpower for the things that really matter—relationships, travel, earning more money.”

Want more proof? Consider an experiment done at a company that required its employees to opt into their 401(k)s. “Everyone knows they should be contributing, but only about 35 percent were doing so,” Sethi says. When the company switched the default so that employees were automatically opted in to their retirement plans, participation went through the roof. “The contribution rate skyrocketed to over 93 percent,” he says. “That’s the power of automation.”

So automate your savings — have money automatically deposited in your 401(k), your IRA, your kids’ 529s, your emergency fund. Automate your debt pay-off plan. Automate your bill payments. Suddenly you’re on time, responsible, saving money, and you never have to lift a finger. Sounds pretty good to me.

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Women in Red: Financial willpower - three ways to find it, one great way to keep it

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