Kristen Berman is co-founder of Irrational Labs, a behavioral product design company, along with Dan Ariely.
She has a fascinating job that involves looking into why people behave the way they do with their money, and discovering the easiest solution to help them create more positive financial behavior.
In short, she’s a proponent of redesigning the current financial system to make saving automatic and easy, and that’s part of what we discuss in this episode.
If creating better financial habits has been a challenge for you, or if you have trouble framing spending as a positive thing, rather than a loss, then Kristen has awesome advice for you.
Here are the key takeaways of this interview:
#1: Habits are overrated – one-time decisions are more effective.
We think about asking people to save every day; this is likely not feasible.
Saving is tough! Some days you feel like you’re on an unstoppable savings treadmill, and the next, you just want to buy expensive buckets of ice cream.
It’s better to make a one-time decision that will automate your behavior. So automate your savings – this takes emotion out of it and forces you to save.
#2: Simplify decision-making by giving yourself a rule-of-thumb to follow.
We’re often told to budget so that we become more aware of our money and make better decisions around managing it.
But…during the interview, Kristen reveals that there’s no behavior science research to suggest that budgeting changes spending behavior.
Think about it. How many people review their budget, and upon realizing they over-spent, actually change their behavior the next time they’re faced with a temptation?
Looking backward doesn’t help us; budgeting isn’t effective enough.
Instead, Kristen recommends giving ourselves rules-of-thumb that will modify our behavior and make it less likely that we’ll overspend.
Imagine a world where I said, the next time I go out to eat, I will only have one glass of wine. Now all of a sudden, I’m not sitting at a table with my friends thinking, “Do I order a second glass of wine?”
#3: Pre-commit to your financial goals.
Irrational Labs conducted a study with Digit around saving tax refunds. Those who were asked how much they wanted to save of their tax refund in February, versus those who were asked in April, doubled their savings rate.
This is because the tax refund money wasn’t in their bank accounts in February. It was in April. Once the money hits your account, you start thinking about all the ways you can spend it. Pre-committing avoids temptation all together.
…when we do this, not just with tax refunds, but generally in life, we’re able to behave in a way that aligns with our future intentions.
#4: Measure process versus outcome.
Many of us are guilty of focusing on the numbers, or the outcome, rather than the process. Who doesn’t enjoy looking at their portfolio or bank account when the numbers are increasing, right?
The problem is that when the numbers are decreasing, we become upset and disappointed, which could lead to some bad behavior. Maybe we stop caring as much, figuring that our efforts are useless.
That does more harm than good, though. Instead of focusing on the outcome – something that we have no control over – we should focus on the process.
Orientate your life to process versus outcome.
If you’ve set up processes, such as automatic transfers into your savings or retirement accounts, then you’re doing the right things that will eventually lead you to success. Focus on the fact that you’re on the right track, instead of getting down about things that aren’t in your control.
#5: Use accountability partners to reach your goals.
Pick a few select friends or family members that you can share your financial goals with, and – this is key – ask them to check in with you on your progress.
Imagine you told your best friend – I’d really like to pay off my credit card in the next 2-3 months. Just by saying this, you’re pre-committing and making it real.
#6: The Three Bs
The Three Bs is a system you can use to positively change your behavior.
- Behavior: in order to change it, you have to identify it. You should be specific here. If you want to spend less money, what do you want to spend less money on? How will you accomplish this?
- Barriers: Reduce friction and make something super easy to do.
- Benefits: Increase rewards and make something enticing.
Tune into the interview for more details and examples from Kristen!
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