4/18/2014 3:45 PM ET|
4 ways financial procrastination hurts us
There's a list of things you need to do to shore up your finances, but you never seem to get around to it. That's not good.
As a sound money manager, by now you probably know all the good financial things you should do. Save for retirement. Pay off your credit card debt. Ask for a raise. Do some networking. Get a will drawn up.
But if you’re a human being, you might be procrastinating on getting it done. Tired of being financially sabotaged by your irrational self? Us too.
So when we heard about the Center for Applied Rationality, and its workshops for professionals trying to make better and smarter decisions, we decided to hit them up for their tried and true strategies on crossing things off your money to-do list once and for all.
“There are a lot of causes for procrastination,” Julia Galef, CfAR founder and president, told us. “It’s not just one thing; it’s a whole cluster of things, often coming from very different places. So you need to try multiple strategies to deal with it, and/or try to investigate what’s going on, before you can hit on a strategy that will work for you and your specific case.”
That sure got our attention. Here are the four reasons that usually underlie procrastination. Which one (or more) is yours?
1. Are you holding onto the status quo?
The Status Quo Bias is when you prefer, irrationally, what you have now. “If you’re holding onto a red coffee cup, you prefer red coffee cups to yellow coffee cups,” Galef says. “If you’re holding onto a yellow coffee cup, you prefer yellow coffee cups to red coffee cups. Maybe that doesn’t overwhelm all your other preferences, but it affects your behavior.”
She talks about the real example of a man who had been offered a programming job in the Bay Area with a $50,000 salary bump. Nice, right? But he was procrastinating about taking the job. He suspected the reason he might be hesitating was that his friends and family were all in his hometown, and taking this job would mean moving far away from them. So he did a thought experiment, reversing the status quo. He asked himself, “How would I feel about taking a $50,000 pay cut to move to be close to my friends and family?” And he realized he would never do that. The status quo bias was affecting his decision.
“It doesn’t tell you clearly and unequivocally what choice is the correct choice for you, but it does shed a lot more insight on what is actually causing your reluctance,” says Galef.
2. Are you too averse to loss?
Another thing Galef notices, as she coaches her students toward getting stuff done, is loss aversion. “It’s the tendency to prefer avoiding losses to acquiring gains,” she says. “In some studies, researchers have found that people experience twice as much negative emotional impact on losses than they do positive emotional impact on gains.” So you feel twice as bad when you lose $50, than when you first earned that $50.
“I think that is why things like investing can make people so crazy,” Galef says. “If you lose $100, but then gain back $110 dollars, then you lose $100 again, but gain back $110 again, you’re earning money steadily over time, but feel miserable on average, because the losses hit you harder.”
And the stock market is much like this. Historically and over long periods of time (five to ten years or more), the market goes up on average about 7 percent a year. But in between, the market can have some incredible swings.
“There’s something to be said for loss aversion on a large scale. It makes sense to not be willing to take a risk when the loss could ruin your life,” Galef says. (Like, say, investing your retirement money in a risky start-up five years from retirement.) “But on the small scale, when you’re loss averse on decisions involving small amounts of money, you end up leaving so much on the table.”
So ask yourself, are you afraid of taking the next step because of a small risk of loss? For example, are you leaving money sitting in a low-interest-rate savings account that would be better off in the market? Staying in a so-so job you should have left years ago? If so, move your money, or go on an interview. Over time, taking these risks will add up in a big way.
3. Are you sabotaging yourself?
“Procrastination can be a sign that on some level, you don’t really think that something is worth doing,” Galef says. To address that unconscious belief, play another mind game with yourself. Ask yourself whether you would be surprised if you don’t actually open a retirement account in the next three months. If the answer is, “That wouldn’t surprise me at all,” well, there you go.
In CfAR’s workshops, the next step is to ask yourself why you aren’t surprised that you didn’t reach your goal. “Your brain is pretty good at filling in plausible details when you set up the prompt like that, and you often realize potential pitfalls you hadn’t been paying attention to,” Galef says. “If your brain volunteers, ‘Because I just forgot about it,’ then you can set up a recurring email to remind yourself about it. Or if your brain volunteers, ‘Because it never felt time-sensitive,’ you can schedule a particular day devoted to taking care of it.”
If the answer is, “Because it’s going to be a painful process,” keep reading.
4. Is it just not a fun task?
Of course, you often don’t do things because they are not pleasant, like going through the process of getting a living will. To combat this, make the alternative of not doing it even more painful.
“One strategy that works well for me is a pre-commitment,” Galef says. “I make a bet with a friend, where if I haven’t finished the task by a certain time, I owe her $50 or something like that. As I’ve learned from experience, it has to be enough money that it’s actually motivating to you, but not so much that your friend will feel guilty enforcing the commitment!” She also recommends two websites that will do this for you: Beeminder and StikK.
Another idea is to treat your future self like a different person. Is it fair to you, the little old lady, that you’re not saving for retirement right now? Is it fair to you, the parent of two, that you haven’t asked for a raise?
“For some people, at least, a feeling of obligation and compassion toward their future selves can be quite motivating,” Galef says.
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