In the last few weeks, we took a look at problems in the current paradigms in managing one’s finances. I also proposed a manifesto of financial self-determination to help individuals of every financial stripe take control of their personal financial situation and start moving in the direction of greater strength and confidence.
This week we will take that process a step further and train our lens on what characterizes these people who set and drive their own agendas so actions and events accrue to their financial benefit. What do they do differently? How can we also learn from their habits and begin to take those first few steps towards greater financial self-determination.
Why does this matter?
It’s important to know, as individuals and as providers, what exactly we’re shooting for. When we come across the latest financial self-help book or method, or as a provider, a business proposition to better appeal to who we serve, how do we know if it serves the ultimate purpose of making us (or the end- consumer, as the case may be), financially better off as a result?
Equally important, can we make this set of measures or yardsticks tight enough to be effective and yet loose enough to fit the vast variety of individuals who make up any community or society?
My contention is that these are both possible. After sifting through various approaches to managing money widely available both in the popular press and on the internet, I began to get a sense of what worked and what didn’t. Further reflection and analysis helped to nail these nebulous thoughts into a set of five core behaviors or habits that an effective approach, product or solution must induce or encourage for it to work towards the user’s ultimate financial benefit.
Said differently, if we were to take a supremely financially self-determined person, chances are we would see them exhibiting most if not all of these behaviors across all areas of their financial life and well-being, specifically:
- Earnings and income
- Debt and borrowing
- Spending wisely and well
- Managing the financial costs of lifestyle choices
- Protecting against risk
The five habits
Financially self-driven people:
Take charge of the destination:
We have all heard the over-used Lewis Carroll quote from Alice in Wonderland:
“If you don’t know where you are going, any road can take you there.”
Lewis Carroll, Alice in Wonderland
One of the biggest challenges that people face is not having a clearly measurable goal and a quantified target on it on any of the areas we talked about above. But unless you define exactly what you want to have, how will you ever know if you got there.
The immediate and valid push-back is going to be one of two things:
- It’s impossible to quantify some things such as “a peaceful retirement” or “enough to live on for the rest of my life”
- We can define these destinations all we want but there are so many factors out of our control that it’s pointless to do so in the first place
These are both valid but they fundamentally misunderstand the task: the important thing is not to define the ultimate end-goal, the one all-in metric that corresponds to your destination. Rather, the key is to define a metric that has two important characteristics:
First, it has to be fully in your control. So rather than defining the metric in terms of what you want at retirement, it’s more energizing and practical to define what part of that equation you do control, for example, your contribution to the retirement plan.
Second, it has to be defined in some quantified metric: so, for example, you would define your contribution to match some objective quantity, whether it is specified in hard dollars, or matches some external yardstick, such as the maximum allowable by the law.
It’s certainly tempting to go on a binge to set targets in every area of your finances- but you may be better off starting with just one. But make sure it’s an active goal and one that you’re currently working on. Once you achieve that and put it into auto-pilot, you can repeat this virtuous loop all over again (but more on that in a minute).
Actively monitor status
Now that you’ve set a goal, it’s not enough to sit back and expect things to kick into high gear. The second step is to ensure that movements in this metric stay within your range of conscious awareness. What this entails is ensuring that you have at least one metric (and in this case, fewer is definitely better), that you are actively tracking periodically.
The frequency may vary – you might decide to do it weekly for your credit card debt or expenses and no more than once in a quarter for your retirement accounts. But the important thing is that taking a look at just where that metric is every so often is absolutely vital even if you prospectively have no plans to act on any changes. Mere awareness spurs progress, miraculous as it may sound!
Take active decisions with a quantitative basis
The bane of most people when it comes to their finances is the immense amount of inertia they need to overcome to take even the smallest decisions or actions. The typical red tape and complexity of even the most basic processes complicates this further.
The result is that an astounding percentage of our positions are nothing more than the default values set at inception: for example, think of how many times you have changed the settings of your contribution to a retirement account, the basic variables on any tax-related forms, or even how you choose to receive statements. It’s simply too much work to bother.
While this is relatively harmless, if inconvenient, in some instances, there are many where we simply cannot afford to “go with the flow”: if we kept on paying only the suggested minimum payments on our credit cards, it would take forever and a day and we’d fork over significant amounts of cash in interest. Acts of omission with regard to savings can have even more significant impacts.
A second insidious aspect of this problem is that while we may take an active decision, frequently it’s not based on any objective information: rather, it’s easier to go with gut feel or the choice that a friend or family member has made.
There is definitely a balance to be drawn here: there’s relatively little extra benefit to voluminous amounts of number-crucnhing. Typically, even a very basic set of thoughtful numbers is more than enough to guide you the right way. This is a very productive use of the Pareto principle. To begin with, looking at even one single metric to drive your decision will be excellent practice in drilling down to the least effort needed to get the most bang.
Habituate or automate financially beneficial actions:
Continuing the theme of inertia and the difficulty of avoiding the path of least resistance, use it to your benefit by automating all the things you could do that would be easy to do at one shot, but difficult and inconvenient to keep doing every week or month.
For example, socking away money from a paycheck into savings, paying off extra on debt, automatically investing in equities or other investments are all simple to set up, and typically the money is never missed, to your benefit.
Build behavioral safeguards:
The hard-wired biases and distortions of the brain are a frequently occurring theme on this blog, and for good reason: left unchecked, they can single-handedly destroy any prospect of financial security or abundance. Yet, we know that outwitting them can be incredibly tricky, if not downright impossible.
What’s a live human to do?
The answers are fairly straightforward: the trick is to build in a set of standard checks that counter and significantly mute the magnitude and impact of these biases. Make no mistake: you’ll probably still fall prey to their effect, but you’ll limit the damage significantly, and even remove their presence in some cases.
What are some of these behavioral safeguards: There are many, and actions such as automating beneficial transactions also fall into this category. But here are a few more to prompt your thinking:
Trackers and journals: tracking things on paper, such as daily spend, balance in an account, or whether you did an activity or not, with entries as simple as a dot or check mark, can be incredibly effective in bringing the rational mind to the forefront. For the more literally inclined, journals to flesh out specific or thorny aspects of behavior change or even of a problem you’re trying to solve, can power up your problem solving capabilities significantly
Checklists: Keeping simple checklists to ensure you don’t miss out on key parts of processes reduces cognitive load on your mind, while increasing the chance that you’ll do everything you need to and not miss out on key steps. There is a reason that the armed forces, pilots, emergency response teams and doctors worship this tool: it works!
Counter-checks: A counter-check is simply a small process you put in place to habitually go through whenever contemplating a specific decision or action. The whole point is that the steps in this counter-check are designed to bring the naysayer in you to the fore, and therefore reduce the chance that you’ll do something impulsive and detrimental to your pocketbook. Here is an example and one of my favorites: I have a weakness for books and am strongly tempted to buy whatever latest best-seller promises to change my world-view or teach me something based on new data. Simple counter-check: I put it on my wish-list and never buy it before it’s been on my checklist at least a day. Typically the white-hot desire dies a quick death and helps me sift through the chaff and remember the really good ones I finally do end up buying. Other possibilities: having a “Debbie Downer” friend to point out all the negatives of the proposed course of action, imagining or writing down the worst case outcome. The key is that deploying this counter-check should become automatic (and it will, with practice)
Decision heuristics: Decision heuristics is just a fancy term for simple rules of thumb you develop to help you make fast decisions without taxing your mind too much. They won’t be perfect but they don’t bog you down with a lot of heavy mental work, and they’ll work well enough a majority of the time. You’ll develop these based on your own needs over time. For example, they may be as simple as ” never pay more than $50 for a pair of pants”. They may also apply to how you make a decision, for example, “List at least 3 cons for every purchase decision I want to make”. The beauty is that they are endlessly flexible, grow and change with you, and are easy to remember.
What do all these habits mean in practice? If you’re trying to become more financially self-driven, the implications are simple and clear: pick one or more of these habits in an area that’s of special relevance to you and start implementing. Start small, start with specifics, and you’ll be well on the road to continuing success.
For a provider, these habits provide useful yardsticks against which to measure and test their offerings: ethical providers can use them to ensure that their products and solutions do not work against these habits at the very least, and design offerings that enhance and promote these habits, at their highest.