By Gil Weinreich
Consumers set new records for dollars spent this holiday season, according to Mastercard Spending Pulse, which tracks this data. That means America didn’t take my advice on giving the gift of financial responsibility, by paying down a student loan instead of giving an iPhone, for example.
Not one to give up easily, I’ll now try this interventionist advice prior to all those new year’s resolutions that will invariably fail: Don’t make a bold plan that will crater amidst a myriad of rationales. Instead, adopt a small, habitual behavior.
New year’s resolutions are known to be by and large a flop—with research indicating something like an 88% - or higher - failure rate. Those are lousy odds.
An interesting psychological study I came across suggests an interesting explanation. The experimenters asked a group to solve very difficult problems requiring tremendous persistence. One segment of the group was permitted to eat chocolate chip cookies prior to the task, whereas another group was asked to eat radishes. The two groups were aware of each other. A third group had no conditions imposed.
So, was it the fit consumers of veggies that performed best or the cookie monsters? Or the uncontrolled group? The uncontrolled folks persisted admirably, lasting about 21 minutes, as did the cookie eaters, enduring for about 19 minutes. But the radish eaters gave up after about 8.5 minutes and made far fewer attempts to complete the task. Here’s a revealing quote from the study that will help you understand why:
In particular, none of the participants in the radish condition violated the rule against eating chocolates. Several of them did exhibit clear interest in the chocolates, to the point of looking longingly at the chocolate display and in a few cases even picking up the cookies to sniff at them. But no participant actually bit into the wrong food.
The authors conclude that people have limited resources. The poor radish eaters were depleted before they even began. Does that ever happen to you – at the end of a long work day? You intended all day long to spend quality time with the kids, but only have the energy to click the TV remote? The radish eaters were dispirited before they even began. Ironically, if your goal is to diet, you might be more successful doing so with a chocolate chip cookie in your stomach, but I digress.
And so it is with your finances. Resolving to stop spending more than you earn is not likely to work. The need will arise and you’ll take out the credit card again. But if you instead say that the first 10% of your paycheck each month goes to paying down debt, you’ve set up a process that requires minimal, gradual effort. Once you get good at it, you can expand to the first 15% of your paycheck. The same goes for increasing your savings. You can make all the big plans in the world, but they’re unlikely to be more effective than just scheduling an automatic monthly transfer from your checking account to your brokerage account.
And, if it’ll help you get going, why not indulge in a chocolate chip cookie before setting up those wiring instructions, or the new diet?
Please share your thoughts on this in our comments section. Meanwhile, below please find links to other advisor-related content on today’s Seeking Alpha.
- Eric Basmajian: The consumer is maxed out.
- Franklin Templeton Investments on growing economies and fading stimulus.
- And John M. Mason offers his thoughts on economic growth in 2018 and beyond.
- CFA Institute Contributors discuss reviving modern portfolio theory.
- For more content geared to FAs, visit the Financial Advisor Center.