If you’re ever having trouble sleeping, spend some time researching financial goal setting online and you’re sure to be snoozing in no time. It’s not that advice you’ll find is bad per se, it’s just that it is fundamentally disconnected from an understanding of how people behave. Most resources will give you some great meat and potatoes stuff about setting specific, attainable and timely goals. You will nod your head, go home, and forget all about it, doing what you’ve always done before.
If financial goal setting is to be truly successful, it must account for the way in which people behave, including the really stupid stuff we all do from time to time. What’s more, it must be infused with elements that make it motivational, because let’s face it, you’d probably rather get a root canal than lay out a spreadsheet with some dry figures about your savings goals. To help in this important step, we’ve mixed some best practices in financial planning with some truths about human nature that will add a little, dare we say it, excitement into your financial planning process. After all, your financial goals are only as good as your resolve to adhere to them is strong.
The next time you go to set a financial goal, consider the following:
Plan for the Worst - Cook College performed a study in which people were asked to rate the likelihood that a number of positive events (e.g., win the lottery, marry for life) and negative events (e.g., die of cancer, get divorced) would impact their lives. What they found was that participants overestimated the likelihood of positive events by 15% and underestimated the probability of negative events by 20%.
What this tells us is that we tend to personalize the positive and delegate the dangerous. We think, “I might win the lottery, she might die of cancer. We might live happily ever after, they might get divorced.” We understand that bad things happen, but in service of living a happy life, we tend to think about those things in the abstract. A solid financial plan cannot assume that everything will be wine and roses as far as the eye can see.
Picture Yourself at 90 – One of the reasons that we tend to under prepare for the future is that we value comfort now more than we do in the future. Simply put, the further out an event is, the less valuable we esteem it to be. Let’s say I offered you $100 today or $110 tomorrow. Odds are, you’d use a little bit of self-restraint and go for the extra ten dollars. What if I changed my offer to $100 today or $110 in a month? If you are like most people, you’d take the $100 today rather than wait the extra 30 days. The official term for this devaluation over time is “hyperbolic discounting” and it can have disastrous consequences for managing wealth over a lifetime.
After all, if today’s needs and today’s dollars always perceived as more valuable than tomorrow’s wealth and wants, we’ll make hay will the sun shines. While this can be fun in the moment, you’re older self is not going to be too happy eating ramen every night. One of the ways to decrease our tendency toward hyperbolic discounting is to make the future more vivid. Researchers at NYU did this by using a computer simulation to age peoples’ faces and found that “manipulating exposure to visual representations of one’s future self leads to lower discounting of future rewards and higher contributions to saving accounts.” Basically, if you can picture yourself wrinkly, you’re more likely to save. Making your own future vivid might include having conversations about your future with your partner, speaking with aging relatives or simply introspecting about your financial future.
Bake In Motivation – Daniel Pink’s seminal work, “Drive” is a concise treatise on what he believes are the three pillars of human motivation – mastery, autonomy and purpose. By including each of these three pillars in the financial goal setting process, you “bake in” motivation, thereby increasing the likelihood of meeting those aspirations. Mastery is all about fluency with the language of finance. While you may never be Warren Buffett, achieving mastery is the first step toward staying motivated. We procrastinate what we don’t like or don’t understand. Once you are facile in the language of numbers, you’ll stop putting your finances on the backburner.
The word “autonomy” is derived from the Greek word “autonomia”, the literal translation of which is “one who gives oneself their own law.” Being autonomous does not mean going it alone. What it does mean is having enough of an understanding of financial best practices that you can select financial professionals whose goals and approaches mimic your own. Finally, and most importantly, is purpose. One of the biggest culprits in bad financial planning is disconnecting the process from the things that matter most to the person making the decisions. Coco Chanel said it best when she said, “The best things in life are free; the second best are very expensive.” Financial solvency facilitates all manner of good, from charitable giving to family vacations to funding an education. If your financial goals are intimately connected to things that matter most to you, saving will cease to be a chore and begin to be a joy.
Dr. Daniel Crosby is a behavioral finance expert who works with organizations to develop products and messaging to maximize positive investment outcomes. Among his current collaborations is "Personal Benchmark", a system of embedded behavioral finance delivered by Brinker Capital. The title South Gotham is meant to evoke both the foolish side of NYC's financial arena, as well as Crosby's native Atlanta.