Resolutions are hard, especially those that involve saving money. Spending cash, however, is as easy as pie. The secret to achieving your financial resolutions: simple science.
Financial resolutions, whether it’s saving more or spending less, are hard to adhere to. Normally, in the first few weeks of the New Year, you’re as disciplined as a monk. The Starbucks coffees you always purchase on your way to the office have been replaced with a cheaper cup of joe from the kopitiam. You’ve unsubscribed from all the different online shopping websites and your bookmark bar has been wiped clean. You’re making a conscious effort to steer away from taxi queues and resist raising your hand up whenever you’re weighed down with items.
Then, your newfound resolve starts cracking and you comfort yourself by saying it’s just a couple of Starbucks coffees/taxi rides/shopping purchases and it won’t hurt your financial resolutions. By the end of March, any semblance of a financial resolution has disappeared and you’re back to your old overspending self.
Here's our mistakes. Don't do the same.
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
It’s a common thread that ties many separate failed financial resolution stories together – the lack of willpower. Before you start beating yourselves to the ground for this, take heart that from a neurological and behavioural perspective, it’s not your fault.
The Result of Mental Evolution
The brain and cognitive researchers at the Massachusetts Institute of Technology have been working on habit formation for more than a decade, and they’re pinpointed the magical moment when habits become ingrained in us, thanks to rats, a maze, and chocolate. The neuroscientists implanted tiny sensors in the rodents’ brains and put them into a maze. A piece of chocolate awaited the rats who completed the maze. The rat would be put behind a barrier and when it opened with a loud click, the animal would begin the quest to find the chocolate. The first time that the rat was put into the maze, it would gingerly move forward and sniff every nook and cranny, knowing that there was the goodness of cocoa somewhere within the maze.
As the rat repeated the maze run over and over again, it predictably became better and faster at finding the chocolate. However, the scientists discovered something startling – mental activity decreased the more often the rat completed the task. “As the path became more and more automatic – as it became a habit – the rats started thinking less and less,” Duhigg writes in The New York Times. Each time though, there were consistently two spikes in the rats’ brain activities. The first was at the beginning of the maze when the rat heard the click as the barrier opened. The second was at the end when it found the chocolate.
This phenomenon is called chunking and is the brain’s way of converting a series of actions into an automatic routine. It’s an evolutionary process designed to help our mind conserve as much mental effort as possible, and also explains why habits are so incredibly difficult to change or get rid of the moment they are formed, in spite of our best intentions. Whether we realise it or not, we rely on hundreds of behavioural chunks to get through our day. From simple habits such as putting toothpaste on our toothbrush to even more complicated actions such as driving a car to work, we automate almost all of our daily processes.
The Formation of Bad Habits
To understand how we can succeed in our financial resolutions, we need to understand how habits are formed. In a nutshell, our brains use a simple three-step loop – cue, routine, reward. The cue is the trigger that tells your brain to automate the process. The routine is the automated process and can be physical, mental or emotional. The reward is at the end and helps the brain to figure out whether this loop, or habit, is worth remembering for the future. For our rodent friends, the click of the barrier was the cue, the maze was the routine, and the reward was the piece of chocolate.
Over time, as our brains get more efficient, the cue and the reward becomes neurologically intertwined. This is when cravings appear, and explains behaviours such as morning coffees (of which I admit I’m guilty of), afternoon donuts, and the like.
Believe it or not, all our habits (and not just the ones that have obvious cues and rewards), both good and bad, can be broken down into this three-step loop. For example, take the habit of driving to work. The cue could be the sound of the engine starting and the reward is the relief that the brain feels at having successfully navigated the highway.
Breaking the Habit
We all know that habits can be ignored, changed or replaced. Yet, we also know that old habits die hard. “We extinguished the habit by changing the placement of the [chocolate]. Then, one day, we’ll put the [chocolate] in the old place and put the rat and, by golly, the old habit will re-emerge right away. Habits never really disappear,” says Ann Graybiel, one of the MIT neuroscientists involved in the rodent experiment.
The key in breaking a habit, according to her and other behavioural scientists, is to figure out the loop – the existing cue and reward – and then, introducing a new cue and reward that piggybacks on the old habit. Most, if not all, cues fit into one of five categories: location, time, emotional state, people around you, or the action that preceded the craving.
Let’s use my two-coffees-a-day routine as an example.
In the mornings around 845 am, I always drop by the hawker centre near my workplace and order an iced coffee.
Location – Walking to the office
Time – Mornings before 9 am
Emotional State – Sleepy
People around me – Folks going to their respective workplaces
Action before craving – Listening to music
Interestingly, I never drink coffees on mornings that I don’t go to work such as on the weekends or on days that I’m on leave. So, clearly, location was the cue for my morning coffees. Occasionally, I tried drinking hot coffee in the morning but I always reverted to iced coffee, as I relished the coolness of the drink before starting on my work. The reward, in my case, was the refreshing nature of the iced coffee. If I genuinely wanted to save money by not buying my S$1.10 iced coffee (and thus saving about S$25 a month), I would make a cup of iced coffee at the office pantry. The auntie at the kopitiam makes far better coffee than me though.
Afternoon coffees were slightly different. Iced or hot coffees didn’t matter, as long as I had a drink. I also always had to get one around 330 pm. It became clear to me that the cue was the time and the reward was being able to get out of my seat to stretch my legs for a bit and get the blood circulating. Of course, my afternoon coffees are courtesy of the pantry, so there are no financial sinkholes I have to plug.
Keeping to Your Financial Resolutions
So, as the New Year rolls around, take a look at the different financial resolutions you’ve created. Before you embark on these resolutions, analyse the cue, routine, and reward of the previous habit that you’re trying to eradicate. Once you figure out the cues and rewards, it’s easier to change the habit.
To use an example, your financially draining taxi rides could be solved by simply identifying the cue, most likely one of the following – location, time, emotional state, people around me, or action before craving – and the reward, which could be getting home by a certain time or even having a conversation with the taxi driver. If your cue is the lateness of the hour and your reward is getting home earlier so that you can sleep more, perhaps all you need to do is to re-schedule your social obligations so that you can take an earlier bus or train home.
Once your financial resolutions become habits, you’ll start wondering what made achieving them so difficult. And the reward – well, a healthier, beautiful-looking bank balance. Seriously, who doesn’t enjoy seeing those digits get bigger and bigger? We know we do.
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