10 Tips to Supercharge Your Finances

For crying out loud, Don't Follow the Herd!

Note: This is from an article I wrote for ESI Money in 2019.

If I could have a career do-over, I would have specialized in the field of behavioral finance – a field that didn’t exist when I earned my PhD.

It’s a fascinating field that combines research and theory from finance, economics, and behavioral and cognitive psychology to explore the driving forces behind the financial decisions that people make.

Behavioral finance is at work every day. And unfortunately, we often fall prey to the true and tested gimmicks.

For example, take the 2-for-1 sales. How often do you buy two items to get the deal – even though you never intended to buy the first item? The marketers are slick and have us consumers all figured out. But what if we use behavioral finance theories to super charge our finances? Well, we can!

I’ve scoured through the literature and there are nuggets scattered here and there. An excellent resource is Duke University’s Common Cents Lab at the Center for Advanced Hindsight. I’ve organized the tips into three themes: herd behavior, mental accounting, and timing.

Herd Behavior

Tip #1: Don’t follow the herd.

Let’s face it, humans have a tendency to follow the crowd.

When thousands of people are running in the same direction, it can be pretty challenging to walk against the tide.

But in terms of finances, one of the BEST things you can do is NOT follow the heard.

When the housing market is hot, everyone jumps on the mortgage bandwagon. And as the stock market climbs to historic levels, people are leaping into stocks. Housing markets decline. Stock markets crash.

Warren Buffet said it best, “Be fearful when others are greedy and greedy when others are fearful.” The time to buy is when the markets crash – there’s your 2-for-1 sale!

Tip #2: Choose your friends carefully.

Speaking of herds, your friends have a tremendous amount of influence on your income, expenses, and success.

If you hang out with a squad of hard-working, ambitious friends, you’ll likely fall into the same pattern.

But if your friends live for happy hour and jump from job to job, you might want to consider a new batch of friends!

Or maybe there’s a middle ground? We don’t talk about money. Maybe some of your friends also have concerns and are open to less expensive options, like game night? You never know until you ask.

If you are on the path to FIRE (financial independence, retire early), it can be a lonely path.

Make no doubt about it, your desire to leave the workforce before your hair turns grey places you deep into a counter-culture. You will be traveling upstream. Your friends and family might not “get it.” Take advantage of online blogs and forums that are filled with like-minded people. You’re not alone, but you are bucking tradition.

Mental Accounting

Tip #3: Be flexible with your money.

Mental accounting claims that we classify personal funds differently, and because of those artificial classifications, we sometimes make irrational decisions.

For example, we tend to think of our money in terms of money jars or money buckets. We have the retirement and savings jars, but we might also have different jars set up for travel or a new car or a splurge. Generally, this is a good strategy.

The downside is that once we place the money in the jar, we’re reluctant to spend it on things that would be wiser choices.

Let’s say you are putting money away for a vacation, but you have a high-interest credit card balance. It’s going to make a whole lot more sense to pay off that balance first. Then you can make the vacation a reward for your accomplishment.

So don’t be afraid to pull money from one jar when it makes financial sense to devote it to another purpose.

Tip #4: Make a plan for “found” money.

Here’s another fact about mental accounting. We tend to make different decisions based on where the money comes from.

In your dream world, you win $10,000 from a scratch-off card. What do you do with the money? Do you treat the money the same way you treat your paycheck – put so much toward debt, retirement, and savings? Or do you “blow it” on gifts for yourself and others?

Psychologically, most people “blow it,” treating it as free money to spend. In a recent study, researchers found that one-third of big lottery winners actually went bankrupt—they were worse-off after winning the lottery.

And in many cases, that mentality carries over to all “found” money – like income tax returns, gifts, inheritance, bonuses, and pay raises.

How do you prevent “found” money from disappearing? You make a “found” money plan. Sure, it’s okay to treat yourself a little bit, but you want to continue aligning your money with your priorities.

Tip #5: Use rounding up to your advantage.

Another aspect of mental accounting is our tendency to round numbers.

Not only do we round to the nearest dollar, there’s a tendency to round to even the nearest hundred or thousand-dollar mark.

So if you have a mortgage of $1,383.89, and I ask you for how much you pay each month, you might say, “about $1,400.” You round up to the nearest hundred. Using round numbers simply helps us run the calculations in our head.

Why not use this tendency to round up to improve your bottom line?

Pay extra toward your principal so your mortgage payments are actually $1,400. Better yet, round up $1,500.

Plus, there are some apps that will do this for you on a smaller scale. For instance, if you charge $4.34 on your debit or credit card, the service will round up to $5 and deposit the change in your account. Depending on your usage, the pennies can add up quickly.

Timing

Tip #6: Time your decisions.

There’s a book written by Daniel Pink, called When: The Scientific Secrets of Perfect Timing.

Here’s the premise: People think timing is an art, but in fact, it’s a science. And you can use it to your advantage. How can you make huge strides by simply timing your decisions? Pay attention to the clock.

It turns out that the absolutely worst time to make decisions is the mid- to late-afternoon. Pink refers to the 3:00 hour as the “witching hour.” That’s the time when our energy lags and we just don’t think as clearly as we did in the morning.

And the science around timing is quite fascinating. For instance, companies that provide their earnings reports first thing in the morning tend to be received more positively and experience an uptick in their stock price compared to companies that report earnings in the afternoon.

The interesting thing is that nearly identical reports are interpreted differently based on just one factor – when they were delivered.

What’s the lesson here? If you want to ask the boss for a raise, do it in the morning. And never move your money around in your retirement account in the mid-afternoon!

Tip #7: Prepare to wait.

Here’s another example of how time impacts our money decisions.

Pretend you have a credit card rate with a high 20% interest rate and you’d like to negotiate with the credit company to lower the rate. Researchers observed twenty people negotiate their credit card interest rates and surveyed 5,000 people on bill negotiation. The Common Cents Lab found that the biggest barrier to a lower interest rate was: PICKING UP THE PHONE AND WAITING! That’s it!

Once people did that, their ability to negotiate had absolutely no bearing on whether they received the lower rate or not.

Tip #8: Leverage milestones.

Birthdays are always special, but there’s something about birthday milestones.

Reaching age 30 or 35, or 40 or 50, just seems more important than reaching age 33 or 47.

So one of the tips to help you set goals is to leverage a milestone.

I did this myself—setting out on a mission to build a net worth of $1,000,000 by the age of 50. I didn’t reach that goal, but I’m convinced that it propelled me on my path.

So the tip is to think in 5-year chunks and to leverage those milestone birthdays and events to reach financial goals.

Tip #9: Automate!

People have a tendency to believe that they can outperform the stock market and even the smartest investment advisers.

And once in a while, they get lucky by picking a stock at exactly the right time.

But most of the time, timing the market fails. Research shows that men are more inclined to believe that they can outmaneuver the experts than women, so they tend to trade more within their retirement accounts. And guess what? Men’s performance lags behind women’s.

With this knowledge in hand, your tip is to automate transactions as much as you can. Invest regularly and deposit your money into funds automatically.

And you should do this with your regular expenses too – like rent, mortgage, car payments, and utility bills. It’s really a win-win situation – it saves you from clutter and you never forget to pay a bill.

Tip #10: Limit treats…don’t eliminate.

Finally, here’s your last money-saving tip.

If you’re working toward financial independence, you probably have a tendency to be as frugal as you can. After all, the more you save the sooner you can escape the rat race.

But there’s a problem. You can’t deprive yourself of all the good things in life – and you shouldn’t. When you deprive yourself over and over, you are more likely to end up on a wild splurge or eventually give up all together.

The Common Cents Lab found that people regretted spending money on dining out, including the morning coffee break, more than any other category. So they tested different ways of limiting those purchases.

What they discovered is that the most successful people focused less on the amount they were spending on those items, and instead, limited the number of times they dined out or enjoyed the expensive cup of coffee.

It turns out, we need rewards. If we build in treats or rewards, like dining out, it helps us save money and appreciate the finer things in life all that much more.

Our Mindset and Behaviors Rule the Day

The math behind financial independence and early retirement is incredibly simple.

So why do so few people jump at the opportunity to create a life that allows them to pursue their passions without worrying about money? It’s not for the lack of knowledge!

Instead, it’s a combination of our mindset, habits, attitudes, and behaviors that rule our destiny. We have to become mindful spenders and feel empowered over our finances.

If there’s one thing I’ve learned building the Money Road Trip, where I navigate people on their journey to financial freedom and the life of their dreams, it’s this: financial freedom is accessible to many, but it’s not an easy path.

It’s less about the money and more about our psychology, our experiences, and our dreams for the future.

It turns out that people don’t want information, they want transformation. And that’s what the Money Road Trip delivers. Hope to see you inside.