Automate Your Finances
Do you want to improve your financial situation the easy way?
A field combining Psychology and Economics — Neuroeconomics — attempts to explain why humans behave the way they do in certain situations. While many economic models can be simplified by assuming that their subjects always make rational decisions, that’s not necessarily the best way to look at the behavior of an individual. In short: human decision making involves many obvious and hidden biases.
Make it through that last paragraph? Good… I only have one more concept to tell you about: impulse control. Humans are good at understanding the benefits of doing things now vs. doing things later, but they aren’t always good at picking the ‘later’. We have a heavy bias towards the short term.
To take control of your finances the easy way, you simply have to understand where you are biased, and set things up in such a way that you don’t have to weigh short versus long term benefits.
Direct Deposit and Automatic Transfers
The absolute best thing you can do to override your bias for the short term is to automate your finances. You might already be using direct deposit to avoid a trip to the bank. One easy step you can take is to direct deposit some of your paycheck into a separate savings account. Simply by moving your money to a place you are less likely to access it, you improve your chances of financial success.
You already might be contributing to a 401(k). Once you have a savings account on autopilot, why not put some money into a Roth or Traditional IRA every month, automatically, as well?
Saving up for a goal a few months out? Start saving automatically in an account earmarked for that goal. Just as periodic payments are an easy way to acquire some goods (like houses), they are also a good way for you to save up for goods and services you want!
Set Your Finances On Autopilot
Daniel Kahneman won a Nobel Prize in Economics (as a Psychologist, amazingly) for his discoveries in Neuroeconomics. Luckily for us, he helped map out a lot of our less obvious biases as human beings.
Use his work to your advantage – automate your finances to avoid the situations where you might make inefficient decisions. You can increase your savings, improve your retirement savings, even pay off debt automatically.
Try it for a few months. I think you’ll be pleasantly surprised with the system you can set up!
PKamp3 is a writer at Don’t Quit Your Day Job, where they understand the mistakes they make even as they continue to make them (while writing about Personal Finance and Economics)! You can also even ‘automate your reading’ with their RSS feed.