In part 1 I outlined 6 key pieces of information behavioural science has dug out on managing your money. We discussed knowing where your money is going, setting SMART goals, split your accounts according to purpose, saving first, direct debits, automation and “hiding” your money. At the end of the article I asked whether my readership wanted to read more. And the overwhelming answer was YES. So here we go!
1. Payment Method Of course there’s going to be a section on payment methods, my favourite topic! Since the late 1970s research has shown that when using an easier payment method (i.e. a credit card as compared to cash) you spend more, more often, have reduced spending awareness and are more likely to find yourself in debt. So if you’re a person who is a bit of an impulse spender, you need to make spending harder for you: so either you move back to cash spending, which has a clear limit, or you set yourself very strict budgets on your card spending. It's not just real-life spending either. Online spending has proven to be problematically simple as well, with most online stores remembering your card details and some platforms even touting 1-click-buy systems (you know the one). Make it harder for yourself to spend: don’t save your card details anywhere. Don’t use 1-click-buy systems or equivalent. Allow yourself the friction of needing to get up and find your card (details) somewhere. This additional friction, time and effort might actually be so annoying to you that you decide to not complete the purchase. What you were doing was impulse shopping. It often comes from negative emotions or boredom, not from a real need. By increasing the friction on your payments you’ll make it easier to spend less! 2. Be Careful About Subscriptions Very much in the same vein as the previous point, be wary about subscriptions. Because once you’re in, you’re in! A subscription model is a very clever model, from the business perspective. They’ve convinced you their service/product is worth it. If it is, great, but are you sure the subscription is really the most economically smart way of going about it? Would it not be cheaper to not have something weekly, monthly or annually, but more on a pay-as-need-it basis? Again, it would cause more friction, but that might be for your own (financial) benefit. And if you didn’t have this subscription, would you make as much use of the product/service category as you do now, because you have the subscription? Is it really satisfying your true preferences? Or are you doing this because you’re now committed to the subscription, by way of avoiding cognitive dissonance? Even if the subscription is not 100% what you’re looking for (January gym sign ups anyone?) there is the interplay of the endowment effect (valuing something more because you own it) as well as the status quo bias (aversion to change) and just basic inertia (laziness) keeping you locked into a subscription. You might have actively convinced yourself you can’t live without it (you can, trust me) or you just can’t be asked to cancel it (really?). Either way, this business model serves no one but the business. Keep that in mind!
3. Your Custom Matters! Moving from subscriptions you might not really need to those you do really need: utilities. I’m afraid I’m unaware of pay-as-you-go business models for electricity, gas, hot water, internet and the like, so they are also considered subscriptions. Although, cancelling these subscriptions will have slightly more of an aversive impact than cancelling your HelloFresh subscription. I’m not suggesting you cancel these subscriptions. I am suggesting, however, that you give them a ring to tell them that you don’t think you’re getting the best price and have considered switching providers (it does help if you’ve actually done a tad of research and found a provider with a better deal). Most providers do have price-matching systems in place and will offer you the same deal, or a deal similar enough to keep your custom. Because that is the most important part of the subscription model: keeping the custom means having a very secure income stream. Now I’m not suggesting you do this every month, because honestly, who has the time?! But you should maybe consider this every 6-12 months, especially if your utilities are a significant chunk of your spending. Only this week I rang up my electricity provider because they charged me a connection fee (I have a smart meter and live in a managed building so that’s just BS) and I wanted it waived, as well as ringing them to find out whether I was really on the most beneficial plan for my usage. One 25 minute call later and the fee was waived and I was moved to a cheaper plan. Because they don’t want to lose me as a customer. Result! And this doesn’t just apply to various forms of utilities, but can also apply to other recurring expenditures such as insurance.
4. Maximizing Others’ Contributions
I think not optimizing your necessary subscriptions is leaving money on the table, but I can imagine that not everyone has the time or even energy to do the research and make that call – I truly get it. What I don’t understand, however, is leaving money on the table when it comes to matched contribution schemes.
The most famous matched contribution schemes are those of matching employee retirement contributions in the States, but they go way beyond America. If your employer fully, or even just partially, matches your retirement contribution, you should make use of that. Of course, if you’re barely managing on your wage as is, this is a different story. But there’s a large group of people who could comfortably put some money aside and don’t. Why?!
Again this is partly inertia and the endowment effect: you don’t want to go the extra mile of figuring out how much to contribute and how, nor do you want to lose current income that already feels like yours to benefit in the future. The you of the future is only a distant stranger after all.
Most employers don’t automatically enroll their employees in these schemes because they know that the additional effort required by the employee is enough friction to prevent a lot of employees from signing up. But that person won’t be you. Get them for all that they’re worth and max out how much contribution they can spend on you!
5. Make Your Money Work Harder
Last, but not least, it’s a very satisfying idea that your hard earned money can make you more money, whilst you’re not working. This is also known as passive income, with the most popular form of passive income being (passive) investing.
In America it’s very common to hold stocks, whether that’s in an index fund, in the company you work for or in whatever company you think is going to be the-next-big-thing (like Forrest Gump holding shares in Apple). In the rest of the world stock market participation is a lot less prevalent, although it is becoming more prominent. And this is a good thing.
Keep in mind that when I talk about investing I’m talking about passive, longer term investing. I’m not talking about installing Robinhood (Robberhood!) or equivalents and trading the night away. Figure out what savings you won’t need for an extended period of time (5+ years preferred as a rule of thumb) and how you’d like to invest them. Most people “buy the market” which means you’re holding a portfolio representative of the market. This is the most risk diversified way of investing, which is agreeable even with the quite risk averse among us. If the market grows, so does your money. Of course, the reverse also holds true. But, historically, the stock market has a 6-8% annual growth rate (on average). So there’s something to say for that.
Again none of this is financial advice and you should NEVER invest money that you cannot afford to lose.
So that’s it for my 2-parter on what behavioural science has to say about managing money. No I don’t think this list is exhaustive by a long way, and if you want to know more just tell me – I can continue writing a multiple part series – but here is where I leave you for now!
Which behavioural insight do you think will have the most impact on managing money? Do you apply any of these insights yourself? Sound of on social media and let’s discuss!