No offense, but you are bad at this money thing.
It’s not your fault, entirely. Your brain isn’t wired for it. Just think how hard you work to push back against your own self-defeating impulses.
In addition, you also have to push back against consumer systems that take advantage of your weaknesses and work against you says Dan Ariely, a behavioral economist at Duke University and the author of the new book, written with Jeff Kreisler, “Dollars and Sense: How We Misthink Money and How to Spend Smarter.”
There is no question we are in the midst of a savings crisis, he told CNNMoney. But we are a mess with our spending, too.
With a paltry savings rate of 3.1% and American household debt that reached a new peak of $12.96 trillion in the third quarter of 2017, we are up against some massive forces. It takes a lot of self-initiated action on our part to spend and save better, says Ariely. “We can wait for someone to solve it for us, or you can try to do your own financial hacking yourself.”
It’s not that people don’t know what to do financially, he said. “They know what to do. But in the history of mankind we have not found a situation where just telling people what to do is good enough.”
Here are the biggest money challenges facing us right now, according to Ariely, and how to get yourself to do the things you already know you should do.
Problem 1: Invisible savings
Our savings are invisible: no one sees it, no one talks about it, no one knows what we’re up to and there’s no risk of public shaming for not having anything stashed away. While our spending is excessively visible: what we wear, drive, where we live and what we post on social media is on display.
Although some apps are beginning to offer ways for people to share and compare their financial hard work, Ariely is concerned that just looking at what your friends and neighbors are doing may not be the best advice.
“The reason why I worry about that is because most people don’t save enough,” says Ariely. “If we show people what others are doing, we are not necessarily showing them the right behavior.”
Behavior hacks:
Talk about what you’re saving, early and often. Yes, we’re also terrible at talking about money, but young people are more likely to do it than older people. The more we make visible what we are saving the better we’ll be at understanding it and comparing it, according to Ariely.
Try this for a first strike: Do you know how much your significant other, close friend or parent puts in a 401(k) or other retirement account each month? When you next adjust your contributions, talk it through with your inner circle.
Problem 2: Painless payments
These days, there’s an entire ecosystem of technology companies devoted to separating you from your money with greater efficiency and convenience. Rather than counting coins or writing the amount on a check, you swipe, click or tap.
“Pain of paying is another area where we are going in the wrong direction,” says Ariely. He points out that when you make more automatic payments, you don’t experience the necessary pain of paying. “Automation in payment is the second biggest risk right now. Especially for young people who are taking advantage of all of this.”
Automation can be good — automatically moving funds to your savings account is great, for example. But automated payments are only a good design if you want people to spend more now (as companies and retailers do) he says. They are a bad design if you want to spend less (as we should).
Behavior hacks:
In a world where payments are increasingly going digital, pushing back against the tide and tying yourself to the mast of old-school payment methods like debit cards, checks and cash may seem like a heavy lift.
But, as a way to remain intentional with your spending, refraining from automatic payments can keep you in touch with the bigger costs (ie. less in your future savings) of your spending.
Ariely suggests putting your discretionary money (discussed in more detail below) on a pre-paid debit card. Be sure to avoid loading it up on Friday, when it will feel like you’re flush heading into the weekend, he says. Loading on Monday is better.
Problem 3: Destructive discretionary spending
“There is spending, which is happiness now, and saving, happiness later,” says Ariely. “If we’re not making the trade offs the right way, we may get a bit more happiness now, but at the cost of our happiness later.”
You’re likely aware that spending more means you are saving less. But knowing that is not keeping our discretionary spending in check, says Ariely.
He argues one of the reasons we don’t have self-control regarding saving for later is that we are very emotionally disconnected to our future selves. It’s as though we are paying a stranger, when we save.
Behavior hacks:
Budgets should be weekly, not monthly, according to Ariely. “This is based on the finding that even people who are paid bi-weekly end up spending too much on the first week and not having enough on the second week.”
Ariely says to connect with your Later Self, get an aging app and post a photo of yourself with a clear “Later” look in a place you’ll see it regularly — especially when making financial decisions.
Lastly, he advises we take the time to do a happiness audit: “All our purchases are forward looking, but from time to time it is good to look backward and say, ‘Let me see where I’m wrong.’ Where are the places that I predicted things would make me happy, but they did not.”