Why Financial Knowledge Isn’t Enough
February 11, 2011Last week I talked about how there is an enormous volume of financial knowledge available to anyone willing to look for it. Heck, you don’t even have to look, it’ll find you if you let it. But even with the mountains of knowledge out there about how to become financially independent, there are countless people under financial stress who are considering bankruptcy, facing foreclosure or eviction, or who are a missed paycheck away from disaster. How do we turn this knowledge into action?
Financial wellness, just like fitness, doesn’t happen overnight. There are very few quick fixes, short of winning the Mega Millions jackpot and I’m certain that I’ll win American Idol (anyone who has ever heard me sing is laughing hysterically right now) before I win the lottery so I have to develop a “real” plan for financial independence. If I can do it, anyone can. My willpower isn’t the greatest, as my good friends Ben ‘N Jerry will tell you during my late night ice cream eating sessions. (Karmel Sutra is absolutely delightful.) Willpower alone isn’t enough; humans just aren’t wired for it. (Except maybe CPAs, at least the ones that are my friends.)
So here are a few simple rules to follow to help you make behavioral changes, and this can apply to financial habits, fitness, work projects, or anything that is important to you. I didn’t invent these rules; I’ve read them in books, talked to people who are successful and taken a few tips from them, and have actually implemented these in my life when a behavioral change was needed:
1. Determine a reason why you want to change and write it down somewhere. For a friend of mine, she decided to make changes in her nutrition and fitness habits when she became a mother. She wants to see her little guy grow up, get married, and have children of his own. She has a reason bigger than her old habits.
2. Set up your environment for success. For me, that means NOT buying ice cream because if it’s in the house, it will find my spoon. For my friends who engage in “retail therapy” it means staying out of the mall. You know your weakness. Stop them at the front door. When you create a successful environment, you don’t have to fight as hard to maintain your willpower.
3. Create accountability. Tell people about your goals. If your goal is to stop using credit cards, let your friends and families know. Tell them to remind you of it if you are out with them and pull the card out of your wallet. Pick a person to call once a week to talk about how well you’re doing. On the fitness side, when I knew that I had to go visit my friend Tony at 7 am Wednesday to get my body fat percentage measured (we did this every Wednesday morning for 3 months), you can believe that I chose a salad when I wanted loaded nachos once in a while. I felt like Tony was looking over my shoulder when I was ordering my food.
4. Create small victories. This once per week call to your primary support person can be used to celebrate small victories. If you went a week without a credit card purchase, brag about it a little bit. When my kids were learning potty training / how to wake up with a dry Pull-Up, one of the key parts was a calendar in their bedroom with little gold stars or smiley face stickers. Every time they put a sticker on the calendar, it created a positive reinforcement and encouraged them to do it again. We celebrated each small victory in order to build toward a longer term big victory.
5. If possible, create visuals for yourself. They work. That’s why most fitness infomercials show a before and after photo when they ask you to make 3 easy payments of $29.99. The visuals can show you why change is needed. A great example is found in the book Switch by Chip and Dan Heath about a company that ordered 424 different gloves for employees. All 424 were assembled on a table with the price paid, and identical gloves were purchased by several different factories with prices ranging from $5 to $17 for the same exact product. Visuals also work to chart your progress. I encourage people to track their level of debt (and net worth). As debt goes down and net worth goes up, a simple graph will show your progress and encourage you to make even more.
6. When you slip up (not if), don’t beat yourself up. Understand that no one is perfect so don’t measure yourself vs. perfection. I use a driving analogy to illustrate this point. The rear view mirror is small and the windshield is very large. They are sized proportionately for both driving and for life. Looking back has a purpose, but don’t spend too much time doing it. The rear view mirror is small for a reason. If you spend too much time looking into it, you crash into whatever is in front of you.
Research has shown that we spend an enormous amount of time on decisions at the margin (what stock or mutual fund to buy) but very little on setting up the right financial behaviors (budgeting, saving regularly each week, shopping for discounts: Cash Management: Confessions of a Coupon Hater, etc.) If you spend just a few minutes per week creating and managing a system to help you make substantive behavioral changes, you can take all of the financial knowledge that you have and create success for yourself. Your financial future is at stake, and you have the power to influence the future.