It’s a common dilemma that we all face when it comes to personal finance…We know exactly what we need do to, but we don’t know why we can’t seem to get it done. There are some really interesting reasons for this, ones that actually don’t involve implicating ourselves as ‘lazy procrastinators’. Behavioural economists have been tracking the decision-making habits of people for the past 50 years, and they’ve found that more often than not, our brain is the culprit for why we don’t always do what we need to do.
The gap between knowing and doing
Dr Steven Wendell discusses some important tactics that can help prime our brain to do the uncomfortable but necessary things for our financial freedom:
Understanding what a tradeoff is and how it’s going to affect you in the short, mid and long-term.
Creating a ‘lock-in’ contract with yourself.
Guarding yourself from social comparison.
Making your financial plan more real through ‘future-setting’.
There’s an opportunity cost to everything. An opportunity cost is the loss of options that we face in one ares when we choose to do something in another area. So, the real question is: what matters most to you? For example: buying a TV means that you can’t spend that same money on a fridge.
It's important to realise that we can’t do everything, and that we actually have a limited amount of resources that we need to allocate for survival, safety, comfort, entertainment, emergencies, and for our present, and future selves.
The human brain is a process driven mechanism. We can help it avoid information paralysis by writing really specific goals for our future. Our brain loves clear and precise commands because it's built to find meaning in all the disparate pieces of information in the world. Plus, the more specific your goals are, the more likely it is to get done, because it’s really hard to find enough reasons to doge something that’s very specific.
When your plan falls apart and you catch yourself slacking off — don’t beat yourself up. We tend to underestimate our brain’s influence on our day to day lives. Our brain controls our decisions and reactions way more than we think — we’re not 100% in the driver’s seat all the time. It’s normal to have a really important goal, and also find ourselves constantly putting it off, for months and years.
Create a ‘lock-in’ contract with yourself
We’re really bad at forecasting our own future. So, we need to ‘lock in’ our own intentions in our moments of strength. Have a ‘Ulysses’ contract with yourself. This is a ‘lock in’ contract (with yourself or significant other) that you can’t break out of. Just like Ulysses in the Greek myth; when he forced his shipmates to tie his hands to the mast of the ship. He knew that our human nature can let us down during times of turbulence and turmoil – we just don’t think straight during some of these critical moments. So, he made the decision and set up a strategy when he was strong and sound of mind.
We can learn a lot from this allegorical Greek myth. Especially when setting up and sticking to a strict financial plan.
Cultivating the right mindset
Don’t get stuck in social comparison
Don’t compare yourself to other people who are doing better than you. Accept the fact that you are where you are, and own your situation. It’s great to see others doing well and be inspired by them, just don’t get bogged down in the semantics and don’t think about it more than you need to.
Make your future plan more real
Let’s get creative for a minute. Our mind naturally focuses on the vivid and specific images that you feed it. We can get so focused on the nitty-gritty day to day things that we forget that one day, we’re going to get old, and we’re going to have more needs, and we are not going to be able to work as hard as we can now.
So, if you’re struggling to find the motivation to start a savings system, just visualise yourself in your 70’s. What are you doing, what does your house look like, what does your kitchen look like, what kind of back yard do you have, are your grandkids there?
Once your brain sees those images, it makes it more of a priority to weed out the paths that will get you to your ideal future and retirement. You still have to put in a lot of work and sacrifice, but this technique gives you confidence and context about why you aren’t going out with your friends this Friday night and splurging on bottles at a fancy club.
Understanding the mental Frameworks for taking action
There’s a pattern that most of us follow: when we don’t do something we said we would, we beat ourselves up and rake ourselves over the coals. Well, the gaps between intention and action are actually pretty huge.
“There are actually so many small moments that have to properly align for us to take action.” — Steven Wendell
Our 4 big obstacles:
Attention: We’re not really thinking about the important things we need to be doing.
Emotion: we don’t have a strong enough emotional base to help us take action.
Ability: we just don’t have the literacy to do the things we need to do. For experts in finance, setting up a financial plan seems obvious and general. But, for us — we have a steep learning curve ahead of us in order to get started, and our confidence really suffers with this in the back of our minds.
Experience: this trumps everything else. If we’ve had a bad experience in the past, it dictates what we’re going to do in the future to avoid that predicament.
So, be patient with yourself, you’re juggling way more that you think you are.
Make a plan, stick to it as much as possible, and use these tactics to handle your brain when it tries to steer you off the road to financial freedom.