Real Money, Real Families: Driverless finances: make it ‘automatic’

By Luke Erickson

A few years ago, as a brand new starry-eyed financial educator, I believed that I could change the world through financial education. All I had to do was drop some knowledge on people who really needed it and they would instantly begin on the path toward spending frugally, budgeting, getting out of debt, and investing. I believed that all people really needed was to possess the right knowledge, and once they did, their financial lives would simply fall into place.
Well, turns out that having financial knowledge is a lot like knowing that soda and donuts are bad for you, which we all do; yet, last I checked (which wasn’t this morning), donut shops are hopping, and soda is starting to be fed to customers intravenously the minute they walk into literally any commercial establishment.
Husband: Honey, would you be a dear and grab me a soda?
Wife: You said you were trying to lose weight…and we’re in an abandoned warehouse running from zombies!
Husband: And…
Wife: Oh, you’re right, there’s a vending machine right behind us. Coke or Pepsi?
Husband: (Annoyed) Do you even have to ask that question?
Wife: Oh look, honey, it takes credit cards!
Husband: I love you…make sure it’s diet.
So, yeah, having knowledge isn’t necessarily going to make it easier to do the healthy thing, if opportunities to do the wrong thing constantly bombard us.
Realizing this, smart educators like myself began experimenting with the idea of financial literacy. It’s not just knowledge – people need a plan to use that knowledge wisely. Unfortunately, this strategy also comes up a bit short. As it turns out, this is akin to providing someone with a top-notch exercise plan but not supplying them with any equipment. “Oh, it looks like I can increase my arm strength with these dumbbell exercises…if only I had some dumbbells. Guess I’ll have to settle for reps with this open soda bottle. And a 1 and a 2. Mmmm, delicious.”
The next thing we financial educators have tried the last few years is a buzz term called “financial capability.” This means improving client/student access to the right equipment or financial tools. These could be tools like goal setting worksheets, budgeting forms, net worth worksheets, etc. It also includes access to banks, prime credit tools, insurance companies, low-cost investing options, and proper legal and tax assistance among other things. While there is still much work to be done in this area, we’re already seeing that this approach is still not entirely sufficient to make someone financially healthy. Sticking with our physical health analogy, we’ve started to help folks get some gym equipment to use along with those written workout plans. But in so many cases, that equipment, or plans and intentions just collect dust because we just can’t muster the confidence, motivation, or will-power.
And that brings us to the present, and a new initiative led by the Consumer Financial Protection Bureau (CFPB) to focus on financial health, or financial well-being.
Just as the term implies, this includes knowledge, strategies, tools, and a focus on the relationship between our physical, mental and financial health. Financial health and well-being are less about checking off boxes and more about building strong long-term habits that one can continue now and on into the future.
And it just so happens that the new year is a great time to start healthy habits!
Well…let’s be honest. It’s actually a good time to start them if you want them to fail. At least that’s what the statistics say. Only 50% of Americans bother to make a new year’s resolution in the first place. And of those 50% who actually try, 80% will end up failing their resolution by the end of January. In the end, only 4% of Americans will end up keeping a resolution for the entire year. “So…you’re telling me there’s a chance!” Yes, indeed, 4%. So, who knows? Maybe this is your year!
When it comes to improving our personal finances it’s not uncommon to view the goal as a checklist. “If I do XYZ, THEN I will be financially successful!” But that’s like thinking if you check off, “Go to the gym” once, that you’re good for the year. Indeed, our financial health is a lot like physical health; it takes regular habits to really make a difference.
Some financial habits will be a mighty exercise in the use of will-power and soul searching to establish. But lucky for us, many of the most important financial habits can be as easy as setting up an automatic transfer with our bank. In one of my favorite financial books, “The Automatic Millionaire,” author David Bach makes the case that nearly anyone possesses the means AND opportunity to become a millionaire. He begins by discussing the latte factor, or the idea that instead of spending $4 on a daily latte you put that money in an investment account. Over time, this regular contribution would grow into a million dollars in just a few decades.
The main question is how to begin the habit of saving that money instead of spending it on the lattes. Bach suggests that if you have an automatic transfer of a set dollar amount from your checking account to the investment account before you have a chance to spend it, you don’t have to exercise will-power or go through the daily struggle of deciding to spend your money on the “right things” or not, because it will have already been done for you. In other words, automatic transfer makes the “right thing” the default. And if you’re going to screw up your own financial plan, you’ll have to put effort into it by intentionally going into your investment account and cashing it out.
So, this year, don’t beat yourself up about mustering the requisite will-power to keep your financial new year’s resolution going past January and through the year. Simply make it automatic.
Now if these new driverless cars can be programmed to speed up anytime it passes a donut shop, we may really be onto some useful automatic habits.

Luke Erickson, Ph.D., AFC®, is an associate professor of personal finance for the University of Idaho. He works and lives in the Treasure Valley. Reach him at erickson@uidaho.edu.

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