“Present bias” can lead us to procrastination, impulsivity, and poor decision-making when it comes to achieving our financial goals.

Making New Year’s resolutions is a popular way to set goals for the upcoming year and make positive changes in your life. However, many people struggle to keep their resolutions beyond the first few weeks of the year.

We know that if we want to lose weight we need to eat less and exercise more. To grow wealth, we must spend less and save more. So why then do we give in and buy the chocolate bar when standing in line to pay for our groceries? And why do we derail our financial plan by using our credit card on impulse purchases, or by buying a car with huge monthly repayments?

This is because our present happiness or gratification is more important psychologically than future happiness. “Present bias” refers to the tendency of people to give more weight to immediate rewards than to future rewards. This bias can lead to procrastination, impulsivity, and poor decision-making.

Three tips to help reach your financial goals

Set realistic goals: Rather than having a goal to be debt-free by the end of the year, aim to pay off just one debt. As you start to see progress in meeting your goal, you will be motivated to keep going and add another debt to the list. This will give you a sense of achievement rather than feeling you have “failed”.

Implementation intentions: Implementation intentions are specific plans that you make in advance to help you achieve your goals. For example, rather than having a general goal to spend less, make an implementation intention to pack lunch for work every day. Each workday, take the money you saved by not buying lunch and put it into a savings account. By making a specific plan, you are more likely to follow through with your financial goals and overcome present bias.

Make a future commitment now: The further away we are from an actual event, the better we are at making a “healthier” decision. In a social experiment, people were asked to pre-order a snack for an event in a week’s time and were 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 was enough fruit and chocolates for them to choose either. Almost everyone took the chocolate, despite their good intentions a week earlier.

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”?

Make a commitment now

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 pay 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.
• Create a 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 two percentage 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.

Present bias can make it difficult to keep New Year’s resolutions. However, by setting realistic goals, focusing on the long-term benefits of your actions, using implementation intentions, and making commitments that are not easy to undo, you can overcome present bias and achieve your financial goals.

Remember that change takes time, and it’s important to be patient and persistent in your efforts. With the right mindset and strategies, you can make positive changes in your life.

This article first appeared in City Press.