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Pathways Advisory Group, Inc.
Evon Mendrin, CFP® |
What motivates you to make good financial decisions? What
motivates you to save, invest, or buy insurance? To spend time and energy
thinking about goals, money, life, and death? These aren’t easy topics to think
about, but you do them anyway – what’s your motivation?
Is it your family? Your spouse and children? Is it that
beach house you’ve always wanted? The thought of free time and financial
independence? Or is it simply the thought of having piles of money and huge
account balances?
Financial planning is all about trade-offs – do you spend or
do you save? Do you pay down debt or do you invest? Happiness today vs.
security tomorrow. It’s easy to focus on the things you want today. They’re
always enticing you, always calling out. What motivates you to find that
balance, rather than spend for your pleasure today?
Whatever that motivation is, research shows that consistently
keeping that motivation in front of you might be the key you need to reach your
financial security.
A 2011 study (Soman and Cheema), searching for a way to help
families save more money, tracked 146 low-income households in India. The study
found that there were two key ideas – certain key actions – that helped the
families greatly save more.
The first idea was segregating and earmarking money into
different “buckets.” The study used separate paper envelopes, but aren’t you
doing a bit of that already? You’re likely already peeling off portions of your
income and diverting them into different investment accounts – IRAs, 401(k)s,
regular brokerage accounts, etc.
With help from the tax code (tax-deferred growth!), you’re
already earmarking certain pots of money for your future self. The same can be
done with bank accounts. You might have checking, savings, and even separate
savings accounts for buying a house, paying off debt, or for emergencies.
The second idea was found to be even more impactful –
enhancing all the other methods. They placed a picture of their children on the
“savings” envelopes.
Why?
For these families, the main goal was to make sure there
were resources for their children. Their children were their primary
motivation. That’s why the parents worked so hard. This simple action had a
substantial impact on their savings rates and helped them not to dip into their
savings when tempted with spending.
The two actions combined nearly doubled their savings rates,
even with very low income. It’s simple, yet effective – and it’s not hard to
imagine why. Visual reminders keep us on track in so many other areas of our
lives.
It’s no fun to exercise simply for the sake of exercising. But
if we keep a “before” photo in front of us, or pictures of the figure/athlete
we want to become, we find ourselves much more motivated to get moving.
It’s also no fun to skip the new car purchase or a few meals
at your favorite restaurant. It’s no fun to fill up your emergency savings when
that island getaway is waiting.
But just imagine – you’re about to use this month’s savings on
a night out on the town when you’re confronted by a picture of you and your spouse
smiling. Imagine pulling out your wallet to pay for that all-inclusive stay,
when in front of your credit card you see a picture of your children.
Just a gentle reminder of why you’re doing what
you’re doing – planning your future, setting goals, making healthy financial
decisions.
The struggle is real, and we’re often our own enemies (I
know I am) – but the tools to help us can be simple.
What shall we do?
Find your motivation. What’s important to you? Where do you
see yourself in the future? Why is that important to you? This should be at the
forefront of all your financial planning. Make your personal finance…well…personal!
Sanctify your savings. That is, set aside your saving into
separate, sacred pots of money.
Most importantly, keep your motivation in front of you. Put
pictures on the fridge, in your wallet, in your financial planning binder. Have
them on your computer screen, your phone, and your tablet. Keep them in your
car and at your work.
What’s your motivation?
If you know it well, it just might help you reach the
financial future you’re planning for.
Special thanks to Dr. Daniel Crosby and his book, The Laws of Wealth, for directing me to
the research!
Source - Soman, Dilip and Cheema, Amar, Earmarking and Partitioning: Increasing Saving by Low-Income Households (December 30, 2010). Journal of Marketing Research, Forthcoming. Available at SS
RN:
https://ssrn.com/abstract=1732709-Written by Evon Mendrin from our June 2018 Client Newsletter Article.
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