Tips | May 16, 2016

Four ways to lose control – and make better money decisions

Broccoli and water are thought to be better for us than Coke and peanut butter – but what if people cannot resist “unhealthy” choices?

Warren Buffett, chairman of Berkshire Hathaway, in his annual letter to shareholders says people should be free to choose what they eat and drink, even if it’s bad for them. Consuming unhealthy calories is a personal decision, he says. Buffett, a billionaire investor known for his tidbits of good advice,has a point – but most of us lack the self-control to stick to the choices we make. It’s a particular challenge when managing finances.

And now that research has found self-control is a resource that can be depleted, we need to take even more care to conserve it. Luckily, there are ways to avoid wasting willpower. Here are four ways to outsource money decision-making and improve financial wellbeing – whether you’re negotiating a mortgage, saving for education or retirement, or deciding about healthcare or insurance.

Tip 1: Sign up to online alerts
Receiving a mobile text message that you’re about to go in the red or have missed a monthly payment can have a powerful effect. The advent of text alerts from banks and mobile banking apps which allow all kinds of transactions on the move has saved many people from extra bank visits and fees.

Research suggests signing up to text alerts or mobile banking apps can reduce unarranged overdraft charges by five to eight percent – and signing up to both can slash extra charges by 24%. Reminders are one of the most important “nudges” that can help us manage money better – as described in Richard Thaler’s bestselling 2009 book Nudge, which challenged the way many people think about decision making.

Tip 2: Automate your finances
Savings and investments – If money is paid automatically into savings or investment accounts, limited willpower can be dedicated to other things. And once set up, the power of inertia. Look for accounts that require you to wait a certain amount of time or reach a particular target before you can withdraw the funds. Research indicates this can really help maximise savings.

Bill payments – Automating credit card and bill payments for regular expenses like utilities, broadband and rent means paying on time with the minimum of hassle. It can be so easy to forget.

Pensions – Enrolling in a workplace pension is an easy way to start providing for retirement. The option becomes even more attractive when employers contribute money as well. In the UK, people are now enrolled automatically in a workplace pension schemes; the Government hopes this will help people save more.

Tip 3: Use a commitment device
A commitment device is a self-imposed arrangement that helps people stick to decisions they have made and would like to keep. One way is by restricting future choices, another is through financial or psychological incentives. Online platforms like StickK allow people to set financial and reputational stakes on their commitments. Economists Gharad Bryan, Deal Karlan and Scott Nelson make a distinction in a 2010 paper between hard and soft commitment devices: if the incentives (rewards or avoidance of costs) are primarily financial, it is called a hard device; if they are mostly psychological, it is soft.

Tip 4: Get an adviser
Managing money is an emotional experience for many of us and the ostrich effect means we may bury our heads in the sand when faced with financially distressing situations. So an outside point of view can come in handy. Good advice might save money in the long run.

And if nothing else, research shows  that getting regular advice can help improve financial and savings habits. Advisers are not only for the super-rich; there are fee-only products which do not require a specific level of investment. Digital investment managers or “robo-advisers” are now available too, offering another way to potentially get more bang for your buck.

eZonomics team
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