Inside each of our minds lives a planner and a doer.
The first knows what’s good for us in the long term and makes sensible decisions based on things like math. The second wants what it wants and wants it now. If the doer makes all the decisions, the financial result is usually dismal, but there is an approximately zero chance that the planner will be in charge all the time. The key, then, is for the planner to put mechanisms in place to constrain the doer.
Dave Ramsey, who sits atop a personal-finance empire, knows this well. From a pure math perspective, not all of his advice makes sense — pay off small debts, not higher-interest debts first, anyone? — but from a constrain-the-doer perspective, his advice has helped millions of people get their finances under control.
If the doer/planner dichotomy sounds familiar to you, here are a few mechanisms for you to consider on behalf of your doer.
Artificial scarcity
It is possible to trick the doer into believing there’s not much money available to spend. Within our firm we have several clients who send us their paychecks and ask us to send them back an allowance. Their solution is one that creates artificial scarcity and puts a barrier between them and their money. It is, after all, still theirs to access, but they’ll have to pick up the phone to do it, and that’s often enough to stop them from spending their savings.
Another, less dramatic way to create artificial scarcity is to split your direct deposit so that the money you live on goes to easy-to-access accounts and the money you want to save goes to an account at a bank you’ll actually have to visit if you want to access it.
Money buckets
Money buckets are beautiful. Glorious, even. For the spender they constrain purchases to just what you have on hand in a given bucket or account, and for the anxious saver they offer permission to buy that blouse or go on that vacation without worrying that all will be lost.
The basic idea is to put your money into different “envelopes” according to its function. Let me illustrate. In my planning practice, every client I work with on budgeting gets to set up separate bank accounts for expenses that are the same every month, like rent and utilities, and expenses that can vary over the month, like gas and groceries. Separating these two guarantees that the rent gets paid no matter what. This alone can have a huge impact on peace of mind. Importantly, we don’t stop at two accounts for necessary expenses.
Large necessary purchases need a separate account, as does the emergency fund you use for expenses in the event you lose your income. In addition, most everyone needs a vacation or big-fun purchase fund, as well as an account for what my mother calls “walking-around money.” This is the debit card you can use to guiltlessly buy a triple-caramel macchiato or a round of sushi. If you are part of a couple, each of you can have an account like this. In my family this means that when I impulse-buy that PlusSizeTransGuy sweatshirt from Instagram (true, recent story), it has no financial impact on my husband.
When using buckets, always try to accomplish two things: Fund automatically if possible (direct deposit and automatic bank transfers both work), and have simple rules for using the money in each account. For example, for us, eating out only comes out of walking-around money, and before we hit our vacation fund we ask whether the cost is more than $50 and sparks a ton of joy.
Know what’s going on with your money in real time
One of the easiest ways to make and sustain positive financial change is to shine a light on your financial reality. This is why nearly every financial coach or planner helping clients with cash-flow issues encourages them to first spend some time tracking every spending transaction. The results are often not pretty, but sometimes just knowing you have a $420-per-month shoe-buying habit is enough to spur real change.
Then, once you have an idea of where your money goes and have made adjustments, you can maintain real-time awareness using paper, a spreadsheet or any of a number of apps, such as EveryDollar or You Need A Budget. This allows you both the peace of mind of knowing where things stand and to try different spending approaches to see what works for you.
For example, some of my clients can successfully use credit cards for everyday purchases to rack up points, but after experimenting, with few exceptions, I found that credit cards are not my friend, points or no points.
Save more tomorrow
I should note that the concept of planner and doer is not mine, but rather the brainchild of the authors of Nudge, a 2008 book by Nobel Prize-winning economist Richard Thaler and lawyer/polymath Cass Sunstein. The book explores what to do about the disconnect between how we tend to behave and what math and best practices suggest we do.
The crown jewel of their economic nudges is a concept called Save More Tomorrow. The basic idea is, if you have both a 401k and annual salary increases, you can set your initial automatic savings in the 401k at a relatively low level (although the financial planner in me would like that to be at least as high as the match you receive). Thereafter, set the plan to increase contributions by one percent each year.
This accomplishes two things. As you receive your annual raise of around two percent (hopefully), you’ll get a bit more money to live on and won’t feel the savings increase one bit. More importantly you will keep your standard of living somewhat constrained so that even as your retirement savings increase, your monthly needs in retirement won’t be as high as if you had set a 10 percent savings goal initially and stuck to it throughout your career.
Tell your doer a story
Beyond financial controls, there is another thing you can do to ensure that your emotional wetware, which likes good things now, behaves itself. It involves harnessing its substantial power for good.
We humans are creatures of meaning and story. For example, we know in the abstract that saving for retirement is good, but it’s hard to make retirement feel important. Connecting that savings to something like being able to eventually become a metal artist or a hang-glider pilot in retirement may be much more meaningful to what Brad Klontz, a certified financial planner who also holds a doctorate in psychology, refers to as the “animal brain.”
To test this point, Klontz designed a study that took a look at the difference between having some participants receive financial education while a separate group visualized savings goals and connected to their emotional “why.”
What they found is that while financial education had a positive impact on participant savings levels, the group that created sentimental attachments to their savings goals increased their savings by 73% over their previous levels.
