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What Makes It So Hard To Follow Even The Most Basic Financial Advice?

Are we our own worst enemy when it comes to money decisions? Financial psychologist Dr. Moira Somers explains.

 

Check out Moira’s recent article Top 10 Financial Skills Needed for 21st Century Well-being

Transcript

Tim Maurer
Hello. Tim Maurer back with another episode of Ask Buckingham, a new video podcast designed to bring clarity in the midst of confusion by connecting your great personal finance questions with straightforward answers from industry thought leaders. Today’s question will be answered by financial psychologist, Dr. Moria Somers. Dr. Somers, it’s often been said about personal finance that it’s not so much about knowing what to do, but doing what we know. What makes it so hard to follow even the most basic financial advice?

Dr. Moria Somers
Oh boy. There’s so many competing demands on us all the time, not only on our time and energy, but also on our money. The best financial advice, Tim, is often stuff that requires us to forgo things that we might like to do with our money in the here and now for things that are much more future-oriented and therefore just a little less pleasure-inducing in the moment.

Tim Maurer
Yeah.

Dr. Moria Somers
In fact, it might even be a little pain-inducing in the moment because you have to give up something you want for something that’s a little bit more abstract in the future.

Tim Maurer
Yeah.

Dr. Moria Somers
There’s certainly that aspect of things. Then sometimes we get tired out. We get depleted. Oh boy. Think any domain of your life. I’m thinking about the standard piece of marital advice that you should have a date night every week, for example. I think I know one couple on the planet that actually managed to pull that off through the course of their marriage. There’s just so many other things that pull at us. In the financial domain, that’s true, too.

Tim Maurer
Am I hearing you correctly that when we have the choice to make, say, between saving for a tomorrow that may or may not look a certain way or enjoy spending that money today, we’re almost always, from a psychological perspective, going to go toward that spending it today and enjoying the benefits sooner rather than later?

Dr. Moria Somers
Well, sure. I almost set up a straw man there, like future uncertainty versus current pleasure, but sometimes the current stuff isn’t all that pleasurable. When the hot water tank blows, it’s not really a shot of joy to replace it. It’s a shot in necessity to replace it. That’s what I mean about the competing demands sometimes, but yes. It turns out that pleasure versus pain does drive a lot of our behavior.

Dr. Moria Somers
Exercise-wise, for example, if you want to increase your own adherence to an exercise program, you need to make sure that it’s enjoyable or else your lazy butt will win the day and you’ll just stop going. The evidence is pretty clear. The more we can introduce a little bit of enjoyment or meaning into our activity, the more likely that we are to follow through with it. In finance, as I said, sometimes it’s not so much about pleasure versus pain. Sometimes we can substitute meaning for immediate happiness knowing that we’re doing something that matters to us, like putting aside money for the kids’ college, or trusting that this vacation fund that we’ve set up will do the trick for us, or that our regular habit of putting money aside to help people in causes that we like, that that also is a way of forgoing what might be something more or less meaningful in the here and now.

Tim Maurer
Okay. How do we do that? Say we’ve got a barrage of competing interests coming in, everything asking for our dollars, everything asking for our time and our attention, how can we get more clarity in that moment and pursue or adhere to that which we know is important?

Dr. Moria Somers
I think we have to make kind of the foibles of the human brain work in our favor instead of against us, right?

Tim Maurer
Okay.

Dr. Moria Somers
One of the characteristics of humans is that we tend to prefer immediate pleasure over long-term gratification, which sometimes doesn’t work so well for us. Another one of those foibles is that once we have set something in place, or once something is just automatically there, we’ve really don’t like to change it. We don’t like to change. We don’t like to tick a box to say, for example, “No, send me this thing electronically instead of by mail.” We just go with the defaults if we can have that working for us by being really intentional and wise about what defaults we set up.

Dr. Moria Somers
The banks know this trick, right? 97% of my countrymen in Canada pay their mortgages on time every month because the bank has it set up as the default. The first thing that comes out of that out of the account when your paycheck comes in is your mortgage payment. They’re going to have their pound of flesh. What if you contrast that with pretty dismal savings rates among Canadians because that isn’t a default for most people? Things like making those deposits go into your retirement account automatically, once that’s set up, we seem to have the ability to kind of shift and organize our financial lives around what’s left in the bank account after that. Setting up the defaults really intentionally and wisely and allowing our inherent laziness to work for us instead of against us is one idea.

Tim Maurer
Okay. Perhaps even then through automation, we can better adhere if you could basically make one decision to do something into perpetuity that you knows good for you?

Dr. Moria Somers
That’s right.

Tim Maurer
We can establish our own defaults where they might not exist the way they do in the mortgage system and the great country of Canada.

Dr. Moria Somers
That’s right. I think, a lot of financial advisors and clients have figured that out. One of the really wise decisions in working with financial advisors is to fill out those forms that say, “This happens automatically.” Lots of people don’t have a whole lot of wiggle room, especially earlier in their life, or if they’re facing financial setbacks.

Dr. Moria Somers
Another trick for making it easier to adhere to good financial advice is to pre-commit to saving more in the future when presumably your earnings will go up or this time of hardship goes away, so that right now you may be only able to save 1% of your paycheck, but you can set a bit of a tripwire so that your next raise, say, you tell the bank to automatically increase the amount that goes into savings at that point, or ask human resources to nudge you in that direction, or if it’s a programmatic raise and you know when it will happen, you just put it into your own date book to make the change that day. When we make those pre-commitments for our future self, our future self often goes along with it.

Tim Maurer
Yeah.

Dr. Moria Somers
It’s kind of cool. It’s when we don’t deliberately, and consciously, and intentionally think about our money lives and our money futures, that things often just kind of get relegated to the, “Someday wouldn’t it be nice,” pile, which doesn’t set us up well.

Tim Maurer
Sure, great. We can automate our financial decisions so that we create our own defaults. If we know we want to save for retirement, we can automatically have that happen. It’s done, so by the time we get our paycheck, we just spend whatever is left. We can then also make auto-escalation defaults in many of the 401k plans. That’s one choice you can make. Then every time you get a raise, it’ll automatically go up. The last question I have for you is back to the competing interests, yet at the same time, we still have to choose what we’re going to default to because none of us can accomplish everything we want to accomplish right now. What advice do you have for those of us who are trying to discern what really is the most important thing to dedicate ourselves to financially?

Dr. Moria Somers
That’s so individualized according to how much we earn, according to what the demands are on us. One health setback can really upend the best laid plans, for example. To become intentional about what it is that’s important, to have money conversations if we’re living with somebody and influenced by somebody else’s financial decisions as we are in families, for example.

Dr. Moria Somers
Being conscious is the first thing. Reviewing that, so being conscious and being intentional about checking in with our financial lives on a periodic basis. As a financial psychologist, one of the pieces of homework that I used to give to people was to track their finances. That was just a miserable experience for most people. It was just a time suck.

Tim Maurer
Yeah.

Dr. Moria Somers
Nobody liked doing it unless they were kind of unusual people or unless they just felt a much needed sense of control from doing that.

Tim Maurer
Sure.

Dr. Moria Somers
Most people, they couldn’t persist in it. The compromise position that I think works really well is to decide when it is that you will review your finances. In our family, we always do that in January. It’s like, “Okay, how did it go?” things like, “How did that category get out of control?” or, “Is that something that we need to make some permanent adjustments around?”

Tim Maurer
Yeah.

Dr. Moria Somers
Then, Tim, because there are some things that we do have to put aside sometimes, but they still really matter to us, they still speak to our values, I often recommend that we set up dedicated savings accounts. It’s so much easier to do this now than it ever was before with online banking that often has no fees. You can have 10 accounts and there’s no fees. You can name each one of those accounts, things like, “Child’s college fund.” It stays there as a placeholder. Sometimes you can make that automatic contribution be highly symbolic, like a dollar a month or something, but it at least kind of plants your flag in the soil of, “This matters to me and I’m not going to forget about it. When my boat comes in, when things turn around a little bit, I am going to circle back around to this thing.”

Dr. Moria Somers
It’s another one of those human brain foibles. The behavioral economists call it mental accounting, that we often treat some piles of money as somehow more special than other piles of money. Sometimes that works against us, like when we declare that our tax refund is somehow free money. We can do whatever we want with it, but sometimes it also really works for us, for example, that very few people raid their retirement savings, especially if it’s gone into some sort of registered vehicle. Very few people raid the kids college fund. That’s often one of the last things that people will turn to.

Dr. Moria Somers
I’m a neuropsychologist and I sometimes get a little offended when I read about cognitive biases as things that are somehow faulty aspects.

Tim Maurer
Miswired.

Dr. Moria Somers
That were miswired, And it’s like, “No, we’re not. Those things persist because they actually work.”

Tim Maurer
Yeah.

Dr. Moria Somers
Even when they do sometimes cause problems for us, I think we have to just really embrace the fact that what they represent is normalcy.

Tim Maurer
Right.

Dr. Moria Somers
As soon as we can get really clear about telling the truth about what it is to be a normal human being, and a normal family, and somebody who gets normally stressed, especially during abnormal circumstances, then we stand a fighting chance. We don’t get surprised by our own stubbornness, or our own impulsivity, or our own depletion. We just take account of that ahead of time and take steps to keep ourselves on the path that we want to be on.

Tim Maurer
Well, that’s the objective, take those steps to keep moving down that path that we ourselves have directed. Thank you so much, Dr. Somers. I know you recently completed a new article on your top 10 list of the ways that people can make good financial decisions in the 21st century. We’ll link to that in the description of this. I want to thank you so much for tuning into this episode of Ask Buckingham.

Tim Maurer
If you have a question that you’d like to see us address, you can do so by navigating to the website, askbuckingham.com, or you can email your question to question@askbuckingham.com, or just click in the upper corner of the screen. It’ll take you directly to the website. Remember that there are no dumb questions, but unfortunately there are plenty of poor answers out there. Our hope is that in giving you straight answers to your questions, it will bring a sense of calm and allow you to apply what you’ve learned in pursuit of good decision making. Please, follow us and by all means, Ask Buckingham.

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