Nudge, nudge, wink wink – how to nudge yourself to better money management
You know you need to change your financial ways. But it’s hard to actually do it.
Just imagine standing at an EFTPOS terminal about to make a financial blunder and someone nudges you into making a better choice. A nudge is like having a little conscience sitting on your shoulder.
Behavioural economists have found that tiny regular nudges that prod you to do things you wouldn’t otherwise can be a real game changer when it comes to mastering your money. The concept was popularised by the book Nudge: Improving Decisions about Health, Wealth and Happiness, by Richard Thaler and Cass Sunstein.
Marketers use nudges against us all the time to buy all sorts of things we don’t need. And governments use nudges for good to get us to be greener, healthier and better with our money.
Nudge your way into being better with money
Little nudges overcome inertia and ordinary folk can manipulate their own psychology for the better with little nudges:
The automatic payment: as humans we don’t get around to things we mean to do. Our “reflective system” wants to do things, but our “automatic system” doesn’t get around to it, the book points out. A simple nudge is to set up an automatic payment that moves a regular sum of money into an investment. A great example is regularly saving for retirement in a fund you can’t touch. With a monthly automatic payment the money drip feeds in and payments can’t be forgotten.
Save the change: so you can’t even spare cents for saving? Some banks have systems that encourage us to save the change, such as P&N. Every time you spend an amount on EFTPOS or Internet banking that isn’t a round dollar, your bank automatically siphons that change into a savings account for you. You could use that to start an emergency fund. Thanks, bank.
The electronic diary: your smartphone is a great nudge tool. Set the calendar app to shower you with repeat reminders until you do what you said you would – such as paying the power bill early to get a discount. Programme in so many repeating reminders that the nudge becomes a nag.
Gambling self-bans: gambling can be a real problem to overcome. The Nudge book introduced me to the concept of self-bans for gamblers, which means that you ban yourself from online or casino gambling (more here).
Automate your bills: if you find you run out of money before you pay your rent and bills and this causes you huge problems such as endless dishonour fees, then you can nudge yourself by automating it all with sensible bill payment systems. Start with a trip to your bank to set up a bills account and arrange for a fixed sum per month to be diverted straight into this account on payday. Step two is to set up all your bills to direct debit from this account. What you’re left with in your current account is your spending money. The nudge means you don’t spend your bills money on wants.
Paying your credit card in full: banks nudge us to only pay the minimum on our credit cards. If you pay just the minimum, then the bank gets to charge you interest. Set up a direct debit to ensure that you never clock up interest. All banks allow you to pay by direct debit.
Bank your raises: a simple nudge step is to up your direct debits and automatic payments to investments or paying down debt every time you get a pay rise. That way the extra money will go towards your future, not be eaten up by lifestyle inflation.
We know it’s easy to fall off the wagon and start behaving badly with your money. The more nudges you can put in place, the better with money you will be. Little changes compound into a whole lot of saving.