We’re Only Human
The problem with a lot of financial advice is that it assumes that once you know the right thing to do, you’ll do it. It can seem as if the people giving the advice had never met an actual human being. Because humans have a whole host of deep-seated beliefs, biases and scripts that influence our financial choices.
Sometimes — okay, often — this programming causes us to do exactly the opposite of what we should do, even when we know what that is. For example, you know you need to save more for emergencies and retirement. So why did you just buy another pair of shoes you don’t need?
The field of behavioral finance has evolved in recent decades to identify and explain these kinks. Financial therapists have emerged to help us unwind some of our destructive behaviors and replace them with more constructive ones. Here are some of the most common reasons, and what you can do to make more rational choices.
What’s Your Money Script?
If you find yourself shopping when you should be saving, you might be able to blame your money scripts — deeply ingrained, unconscious beliefs that drive all our financial behavior, said financial therapist Brad Klontz, co-author of the book “Mind Over Money.”
Klontz and his fellow researchers compiled dozens of money scripts from clients over a decade and culled from those four main themes — three of which can cause overspending:
- Money Avoiders believe money is bad or evil and that rich people are greedy, don’t like to think about money, plan or budget.
- Money Worshippers think money would solve all their problems but that they’ll never have enough, so they often try to buy happiness with purchases.
- Money Status Believers equate their self worth with their net worth, and may try to pretend to be wealthier than they are.
- Only the Money Vigilants are likely to be careful with money, but they can be so anxious about spending that they don’t get to enjoy their financial security.
The solution, Klontz said, is to identify which money scripts are driving your behavior and talk back to them. If you find yourself thinking “I deserve to treat myself,” you could expand that thought to “I deserve to treat myself...to a comfortable retirement” or "I deserve to treat myself...to a home I love with the money I save." If recasting your scripts doesn’t work, therapy might. Sometimes the scripts are so embedded that it can take some work to rewrite them.
Only an economist could love this phrase, which basically means we’re too focused on the present. We’d rather have a smaller treat right now than a bigger treat later. Our unwillingness to delay gratification might have made sense in the distant evolutionary past, when life was brutish and short. Today, it just leads to credit card debt and puny bank balances and retirement accounts.
One way to combat this tendency is to realize that you’re making decisions today that will affect you in the future. If you can imagine your Future Self 20, 30 or 40 years from now — grey-haired maybe, but still rocking that leather jacket — it could be easier for you to make better decisions. Picture her smiling, with a big, fat retirement fund to spend however she wants.
Retailers know all about anchoring, which is how we decide how much something is worth. We can’t keep a running list in our heads of what bazillions of items should cost, so we rely on environmental clues. If a retailer puts out a cheap version of something, a mid-priced version and a high-priced version, most of us go for the mid-price or cheap version, thinking we’re getting a deal — not knowing that the retailer never expects the expensive item to sell, or at least not at that price.
Even the lowly price tag is an example of anchoring. If there’s a red slash through it with a 50% discount off the original price, it gets your attention even when you had no intention of buying the item in the first place.
You can fight back by using your smartphone and a price check app. Even better, create your own anchors. Figure out what you really earn per hour (minus all taxes and commuting costs) and ask if whatever you want to buy is worth X hours of your life.
Loss or Regret Aversion
We really, really hate to lose — even more than we love to win. We don’t want to feel regret. It’s what causes people to invest too conservatively and to hang on to losing investments because selling them makes the loss “real.”
Loss aversion happens on shopping trips as well. What if you don’t grab that item now and wish you had later? Even putting an item into your shopping cart can trigger loss aversion, since putting it back will feel like “losing” it.
So, don’t put yourself in the position to lose. Don’t touch what you don’t intend to buy. Unsubscribe from emails advertising discounts or sales. Drive right past the mall — if you don’t know there’s a sale, you won’t regret missing it.
Avoiding temptation, doing the right things with our money — we could do it if we just had the willpower right? Maybe not. Recent psychological experiments indicate we have a finite amount of willpower each day. It can be exhausted by too much stress, too many decisions or even an environment that’s too cluttered.
One way to fight back is to automate as many good behaviors as possible, and reduce the temptation to indulge in bad behaviors. Set up automatic transfers to savings and to pay down debt, for example. Meanwhile, setting up regular deliveries of staples might be a good idea. Fewer shopping trips will mean fewer decisions to make and temptations to fight.
Liz Weston is an award-winning journalist and author of several money books, including the best-selling “Your Credit Score.” She writes about personal finance at her site AskLizWeston. You can like her on Facebook and follow her on Twitter.