I will again use the framework of Dr. BJ Fogg of the Behavior Design Lab at Stanford because if you can internalize this model, it provides a way to design and think about any new behavior. To learn more you can watch a youtube video here where he explains his model (BJ Fogg's Behavior Change Model) This is an introductory video, but it can lead you down an incredible rabbit hole of behavior.
Without any more delays here is my system
Behavior:
I wanted to take control of my personal finances. Within this topic, that included saving, investing, and targeted spending on things I wanted without feeling like I was living a deprived life.
Motivation:
I was highly motivated because by living in the Silicone Valley, I was surrounded by people living extravagant lives (even people who I knew couldn't afford it). I also was surrounded by Facebook posts, Instagram pictures, Snapchats etc. that showed people taking amazing vacations, doing cool things and I felt like I wasn't. Fortunately, I was smart enough to know that every one of those people felt the same way I did "Financially Inadequate". Just like my Facebook friends, I too was taking a trip here or there and posting these fun and exiting pictures and status updates and they thought I was living the life, but at the end of the day I wasn't doing it to the level I wanted, and I knew the lifestyle wasn't sustainable for long term wealth generation. I was motivated to make a change because I felt like I was tirelessly spinning my wheels and getting nowhere. Thats when I came across Ramit's book and the work of BJ Fogg and got started.
Ability:
Ability is the key to Behavior change. As humans, we are lazy. If we rely on motivation and willpower, eventually we will fail. Just like I was able to go on several months of saving only to binge spend it all away. over the process of the several months of high motivation, I didn't set up systems to make it easier and to optimize my behavior. Eventually through the deprivation and exertion I would crack. Not anymore (at least not as much or as often).
Time:
The Problem:
What I found was I was spending a lot of time every month worried about saving, how much I was spending, whether I was within the budgeted amounts etc. I had to spend a lot of time (usually weekly) to figure out how I was doing.
The Solution:
I needed to find a way to reduce the time I spent on my finances. To do that I had to create an automated system that ran on a series of rules I would sit down and create. Warning: It will take a lot of time and effort upfront to set up this system, but by putting in the time now (or when you are highly motivated) it will save you countless hours, days, weeks, even months of your life down the road. I also found a way to make it take more time to spend. For accounts that where meant for saving, I had to actually go to the branch to withdraw money. This takes infinitely longer than just swiping a debit card (do you get the idea)
Plain and simple, make it take more time to spend money and less time to save money
Money:
The Problem:
Money was the entire problem! I just didn't have enough of it to go around. Every month I would look at my bank account and realize I had spent every last cent. It didn't matter that now I was making 2x as much as I lived off of in college, my lifestyle expanded to fit the amount of money I had available. I felt helpless because now I also had to cover adult expenses like insurance, car insurance, and all kinds of other unexpected expenses.
The Solution:
Again, the solution was creating a system. Unfortunately, because money is such an integral part of all aspects of life, that system needed to include what I was spending money on and really understanding where my money was going (again please don't roll your eyes, I know it seems like I am telling you what you already know, but it will get better. The first two barriers are difficult ones to overcome, but once you do the results are seamless and much easier). If you want to go to the extreme, you can make it expensive to spend money. Retirement accounts and CD's are set up this way where you have to pay a fee to withdraw money. This is a huge disincentive for spending because it will cost you more than just saving it.
Plain and Simple: It all starts with an awareness of where your money is going (once you set up your system, this awareness can move back to your unconscious)
Physical Effort:
The Problem:
It takes no physical effort to spend money, I can sit down on my computer and go into thousands of dollars of debt without any physical effort. I didn't have a huge problem with the physical effort piece, but it does provide an interesting insight for the solutions.
The Solution:
I began to look for ways to make it physically hard for me to spend money. I put my credit cards in random places where I had to physically go get them (some people even freeze them in a block of ice so they have to chip it out). I also set up savings accounts at banks where I had to physically go to the bank to withdraw money (no debit cards, no checks, no online banking).
Plain and Simple: Set up a way to require physical effort to spend. Even if it means carrying cash that you have to get from the bank or freezing debit or credit cards in a block of ice. Find a creative way to make it physically challenging and you will increase your chance for success.
Mental Effort:
The Problem:
This is the big one. Without even having to think, I can spend money. Amazon just requires me to type my username and password and they already have my credit card on file, my shipping address, and my billing address. I just have to hit ok. I don't have to think to spend. On the reverse side, when it comes to saving, I have to think about a budget, what retirement accounts to open, how much I can/should save per month what stocks to invest in, the diversification of my portfolio...
The Solution:
I sat down one day when I was highly motivated and I wrote my budget. I knew how much I made, and I knew what my fixed cost expenses were. From there, I found out how much money I had left over (this is the money I had to decide what to do with). Whether this number is big or small, you need to "spend" it all. It needs to have a place to go otherwise you will unconsciously put it into the spend on whatever category. So I decided what I wanted to spend on and created spending accounts (or savings accounts for spending) These accounts were solely for spending on their specified purpose. I had a "Car" account, a "Golf" account, a "Wedding" account (because who doesn't think they are going to get married, the time to start planning is now), and a "Travel" account. I made it easy to put money into these accounts (automatic transfers to another bank. The one I didn't have a debit card, check book, or online account for) and the only way to get the money out was to physically go to the bank. I had to decide to spend that money for it to disappear. As you can see, the mental piece centered around designing the other ability plays into one system and figuring out how to make it all work.
Plain and simple: I did the mental work up front so that now I have to consciously think and decide to spend money and I don't have to think in order to save money.
Social Norms:
The Problem:
I already referenced the problem earlier. In the US, we have the idea of keeping up with the Jonses. We also have the fear of missing out and we are inundated with all the cool things everyone else is doing except me. I had to overcome this barrier and realize what was operating under the surface. I had to realize that many of these people weren't any happier than I was. I had friends that wanted me to move up to San Francisco (a move that would have almost tripled my rent). I was perfectly happy where I was living. Why would I succumb to these social norms?
The Solution:
My solution was to figure out what "I" truly valued. Did I care if I lived in San Francisco (even if it meant living in a small studio for 3x my current rent) no. Instead, I would rather put the money I saved from rent into traveling and golfing. By realizing that I wasn't depriving myself by not moving to the City but instead rewarding myself with things that actually made me happy, I was able to overcome the social norms that were misaligned with who I am while still pursuing the social desires like travel and golf that most people don't get to do because they don't have the time or the money.
Plain and Simple: We can't avoid social norms, but we can decide which ones we want to fall prey to consciously either by focusing our energy and resources into those things, or by surrounding ourselves with people who have similar values.
Habits:
The Problem:
I hadn't habitualized any of my money saving techniques, but I did have several spending habits like going out to eat, speeding on random things that I encountered. Many of my habits lead to unconscious spending.
The Solution:
I built habits and hobbies that cost less money, but ended up making me happier. I started to take up cooking at home. I found that I love to grill, I also found that I enjoy making food for others because it gives me opportunities to try new things (this habit is much cheaper and much more fulfilling then going out to eat). I go golfing, which many would say is an expensive hobby, but I spend $60 for 4hrs of entertainment and time spend with friends. Instead, some people go shopping on the weekends and spend hundreds of dollars or go to concerts etc. It is all about optimizing the things that make you happy instead of getting scattered. Don't get me wrong, I still go to concerts and I still go shopping, but I don't do it often because it is only fun to me when it is few and far between.
Plain and Simple: Find current habits that are helpful for your desired behavior. What do you like to do already that is cost effective and rewarding?
That is my system, in the next post, I will cover how I have been constantly iterating on this process to make it more effective for me.
Thanks for reading and I hope this gives you a framework to look at your own finances and make a system that works for you.
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Thanks,
Andrew
twitter @andrewzimbd