So why then do we give in and buy the chocolate bar when we purchase our groceries, or derail our financial plan by using our credit card on impulse purchases, or buying a car with huge monthly repayments?
Because we all suffer from something called “present bias”. Our present happiness or gratification is more important psychologically than future happiness.
But what we do know, is that the further away we are from an actual event, the better we are at making the “healthier” decision.
An experiment found that when people were asked to pre-order a snack for an event in a week’s time given the choice between a piece of fruit or an unhealthy snack such as a chocolate, nearly three-quarters of the group asked for the healthy option.
On the day of the event, however, they were told that there were enough fruit and chocolates, so they could choose either. Almost everyone took the chocolate.
But what if you couldn’t change your mind? What if you could set your healthy intentions upfront and have them enforced, protecting you from “present bias”?
To do this we need to commit to something in the future when our resolve is high and make sure we cannot change that decision too easily once present bias kicks in. While you are still in a positive frame of mind, do the following:
Cut up your store cards. The hassle factor of applying for another one will make you think twice.
If you want to have paid off a debt by the end of the year, calculate how much you must pay each month and set up a stop order which goes off the day your salary hits your account. You cannot spend money you don’t have.
Also put a stop order or debit order on your account that immediately goes into savings, before you have the chance to spend it. Include an automatic annual 10% escalation on any savings plan.
Ask your HR department to increase your pension contribution by an additional 2 precentage points with your next salary increase. In other words, if you currently contribute 10% of your salary to your retirement fund, increase that to 12%. You will still have extra money from the salary increase but a portion of the increase is boosting your retirement savings.
If you go “window shopping” make sure you leave your cards at home. Most of us are not able to resist the temptation to buy.
Sometimes we need to protect ourselves from ourselves.