January is when many of us swear we’re going to save more or pay down debt — especially after the holiday bills have landed.
By June, though, a lot of those New Year resolutions have likely unravelled. Coming up with a grandiose plan to slash your spending and channel cash to your savings account or credit card is relatively easy. It’s the sticking-to-it part that trips most people up.
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But why is that?
A growing body of research suggests that’s at least in part because when we set financial goals we ignore the way our brain actually functions.
Here are a few psychological hacks that will help you stay on track:
You don’t need a budget. You need a spending limit and a buffer
Budgeting is one of the first things people do after they’ve vowed to get a handle on their finances. It’s also the first piece of advice many people hear when they seek professional help with their money.
But “there isn’t a lot of research suggesting that budgets will help you in the long term,” said Mariel Beasley at Common Cents Lab, a research lab at Duke University that studies financial decisions.
Budgets are easy to use for short-term goals, like Christmas shopping or a vacation. But as a financial tool for everyday living, they fall short, Beasley said.
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In part, because human brains have “a very hard time conceptualizing extraordinary expenses,” she told Global News.
Sure, we can plan grocery spending, gas, bills, eating out and car payments. But there’s always something that catches us off guard.
There are wedding gifts, visits to the vet, and airfare to fly out for a funeral. These aren’t your typical emergency expenses — like a tree falling through your roof or a job loss — that warrant dipping into your rainy-day fund.
On the other hand, they aren’t part of our routine spending, either. And because of that, most of us fail to properly account for them, Beasley said.
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When we do try to forecast this sort of exceptional expenses, we usually add categories to our budget like “wedding gifts” or “traffic tickets.” Then, invariably, the next month what busts our spending limit is a visit to the vet.
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The solution? Create a generic and generous buffer in your budget for stuff you can’t predict, said Beasley.
In fact, you may want to take your budget-streamlining one step further. In her popular book Worry-Free Money, Toronto-based financial advisor Shannon Lee Simmons suggests simply working with what she calls a “hard limit” on spending. That’s what you get after you’ve set money aside for fixed expenses (bills, rent, debt payments), meaningful savings (retirement, home down payment) and short-term savings for things like emergencies.
Whatever is left, she writes, is money you can spend guilt-free.
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Spare yourself the willpower struggle: automate savings and bill payments
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Once you have your basic saving and spending categories, “automate everything,” Lee Simmons told Global News.
Automatic bill payments and transfers to your saving account mean that “you don’t have to make the choice, it’s made for you,” she added.
Simmons’ advice stems from her experience with clients and her own tendency, in her university years, to spend the rent money.
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But the science backs up that intuition. Cognitive psychology shows that one of the easiest ways to boost savings is to switch to automated deposits.
Every time we manually move funds into our savings account, for example, we are resisting the temptation to spend that money right now or to give in to our natural inertia. Automating what you can spares you a lot of the mental struggle.
In addition to setting up regular transfers from your chequing to your savings account, there are also several apps that can help you squirrel away a few more dollars every month.
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Pay with debit for almost anything
Another way to keep things simple for your brain is to use a debit card for your discretionary spending, which is everything you want to spend money on, Beasley said.
With a debit card, you know that your bank account will drop at every swipe. And that means “you feel the pain of paying in the moment,” Beasley told Global News.
With credit, by contrast, you postpone that mental pain until your credit card bill lands, which makes it easier to overspend.
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For the sake of your credit score, use your credit card to pay bills
Still, many of us can’t afford to cut credit cards out of our lives. It’s hard to build a credit history without a Visa or a MasterCard in your wallet.
To get around that problem, Beasley suggested using a credit card only for fixed expenses like your phone, cable and gas. That way, you can pay off your credit card bill every month as if it was a bill.
WATCH: Understanding your credit score.
Break your big goals into bite-sized chunks
Human beings notoriously have a hard time getting started on big goals like paying down a mountain of debt or saving for a down payment on a new home.
An easier way to approach this is to cut down those big goals into bite-sized chunks, said Beasley.
For example, many financial advisers recommend having six months worth of living expenses tucked away in a rainy-day fund. But saving up that much money can look like a daunting task if all you can squirrel away every month is 10 per cent of your income.
“You won’t feel like you’re making any progress for a long time,” Beasley said.
The trick is to set yourself intermediary targets. For example, at first you might want to focus on setting aside one month worth of living expenses. When you reach that goal, you should allow yourself to have a little celebration.
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Once you start hitting your smaller goals, you’ll find it easier and easier to keep going, Beasley said.
One thing to note, though, is that things seem to work a little differently when it comes to paying down multiple debts.
Many financial advisors and debt counsellors swear by the so-called snowball method of tackling debt, which preaches paying off your smallest debt first. The idea is you get an easy win that will then help you build to psychological momentum to attack your bigger liabilities.
But Beasley said that while the research shows that most people like to pay off small debts, this doesn’t necessarily translate into further momentum. Taking a small debt off your mind may even give you “a false sense of completion,” she added.
A better strategy may be to focus on the debt with the highest interest rate, and, if it is a large one, set yourself intermediary goals to pay it off, Beasley said.
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Pick a positive goal
Speaking of goals, Lee Simmons recommended turning every financial goal into something you want to achieve rather than something you must achieve or else.
A feeling of panic when you look at your holiday credit card bill can be a powerful motivator to start paying off debt. But you won’t last long, if that’s all that drives you.
“Fear-based motivation packs less of a punch over time,” Lee Simmons said.
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Instead, you may want to focus on what you’ll be able to do once you don’t have credit card bill. Maybe you’ll be able to afford a vacation or to pay higher rent for a nice apartment.
One of Lee Simmons’ clients, for example, became very motivated to wipe out his debt when his wife got pregnant.
“He wanted to be a good partner and a good dad,” she said. “So it became, ‘I’m doing this for a bigger cause’.”
Keep it real
Fear can also set us up for failure, Lee Simmons warned.
It can push us to set unrealistic goals that we won’t be able to achieve. And once we miss the mark, the feeling of defeat will make it harder to find the motivation to get started again.
On Jan. 1 you might think you can give up your lattes forever or meal-plan every single work lunch for the next 365 days. But that’s not realistic.
“You cannot be on your best behaviour 24/7,” Lee Simmons said. “And that’s OK.”
Just acknowledge your limits and account for them in your money plan.
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