Objective: Focus on behavioural patterns and the influence they have on our finances.
With a few days holiday and time to clear our minds, many of us find ourselves reassessing goals and priorities for our health, our family and our finances. More often than not this results in the strong articulation of some resolutions that are made with all good intention and genuine commitment. However, fast forward a month or two and those resolutions seem like a distant memory, a commitment made by someone familiar, but yet different from the one making decisions day to day. Why is that? Well, largely because they were made by someone different, or at least with a different part of your brain to the one making most of the decisions. You made the new year resolution, but your ape is running the show when you’re back in everyday life.
You and your ape refers to a way we behavioural economists’ (a name to describe a person who studies the psychology of decision making) explain how we process information and make sense of the world. You (the person on holidays making your new years resolution) is calm, contemplative, rational, and able to think clearly without stress or distraction. However, as we head into the routines of work, family and our busy life, we tend to rely on our ‘ape’ to make decisions for us. Our ape is the most primitive part of our brain, the first to develop in the womb and the part that is responsible for our survival instinct (fight or flight). It is our instinct, our intuitive reactive self.
Our ape is trained to avoid anything painful, primarily because pain usually means something is wrong or potentially threatening. This usually is a good thing as it helps us keep safe and survive. However, it’s also the thing that stops us from making good on our promises to improve ourselves. Our apes are creatures of habit, and improvements usually require us to change our habits in some way. Change is painful so our apes are rarely happy that we want to change our behaviour. This is especially true of our spending habits, where our poor spending patterns usually make our Apes feel really good in the short term. Think of that almond croissant when we grab a coffee, or the pride we feel when way pay extra for a prestige brand (and justify it after the fact as being of higher quality).
When we spend, often it’s our Ape that is calling the shots. The stronger our Ape is, the more likely you are to be making a poor choice that you will feel guilty about later and come up with a rationalisation for the purchase. Your ape reacts instinctively to the world around us, whereas you tend to respond in a more rational way when you are in control. When you’re tired, can you opt to choose a cup of peppermint tea instead of a glass of wine? Who is actually in charge at the moment of your spending – your ape or you? Are you reacting or responding?
Fortunately, there is good news. The more we become aware of our ‘ape’ behaviours, the more likely we are to keep it under control. The more we control our ape, the more we can control our finances. This is true for anyone, irrespective of socio-economic status, level of education, IQ or life experience. This is why some of us are better than others at saving money, and why are some of us are better at curbing our spending and ‘delaying gratification’ (forgoing something in the immediate for something better in the future). This is an important thing to remember – reaching financial goals is less about saving, and more about controlling spending.
In my experience, there are four things that work for almost anyone when changing financial habits to reach your money goals.
First, identify and remove one barrier. More often than not, there is one big expense that you can actually live without that is undermining your financial goals. Ask yourself, “if my income halved overnight, what things would I have to cut out in order to live?” List all the things out you would cut and seriously consider whether you really need it. Undoubtedly one of these ‘nice to have’s’ is creating a barrier to your financial goals.
Second, take your own advice. Practice asking yourself “what would myself one year from now advise that I should do right now?” This helps us distance ourselves from our ‘ape’ by mentally shifting our focus from the immediate feeling to the longer-term perspective. I often feel that wisdom is simply learning to take our own advice.
Third, break big goals down into smaller, achievable behaviours. For instance, if you are looking to save $10,000 in the next 12 months, see if you can save $20 this week, and if you can double it next week, and so on. You ape loves to win, and small wins help hardwire a positive feeling with saving money, which helps you to say no to that bucket of ice cream, or that cherry ripe staring you in the face at the checkout.
Finally, create an environment and routines that instinctively help you work toward your goals. If you are on a health kick, the last thing you should do is fill your fridge with junk food. In the same way, create habits like putting 30% of your income into an account that isn’t linked to a spending card, or choosing a different path to work so you don’t walk past that bakery that smells amazing, or entertain friends at home rather than going to restaurants helps your ape make better decisions when you’re tired or more likely to make a reactive decision. Working on some routines that help you instinctively work toward your goals helps train your ape so that your ape actually works for you.
Four rules to help keep your financial new years’ resolutions on track.
- Identify and remove one barrier
- Take your own advice
- Create small goals
- Create an environment that intuitively helps you.