Published Article Details

Don't define your financial resolutions by what you should not do

Posted by: Uma Shashikant on Jan 15, 2018, 06.30 AM IST

Why is it tough to keep up with New Year resolutions? Many of us habitually decide to motivate ourselves to rediscover and recreate a newer version of ourselves, using the powers of self-motivation to become fitter, to manage money better, to eat healthy and to live better lives. By the second week of January, we begin to slip. Why?

Remember the story about two kids caught on top of a tree when an unexpected gust of strong wind sweeps through the park? Imagine two young children who have enthusiastically climbed up a tree during their play time. They had been climbing up and down this tree in the park routinely so far. On this day, a strong wind blows, swaying the tree and its branches. One mom, terrified about her child getting hurt, screams to the child to not fall. The other tells the child to hold tight, keep the feet and arms firm, and wait. The first child falls, while the second manages to stay. The story illustrates how our brain works.

The brain deals with experiences and habits to create a short cut or a default path of action. This frees up precious processing effort and space, and makes it easy to decide. When the child is asked to "not fall" what is being activated is the fear of a fall. The brain is not able to process information that requires not doing something; it responds better to actual nudges for action, especially if these are new experiences. Psychologists say if we define resolutions in terms of what we shall not do, we end up thinking more about it and reinforcing the earlier habitual decision.

When we resolve to not sleep late into the morning, we think so much about sleeping that we inadvertently return to the old normal of waking up late. That default is easier to slip into. What the brain needs is a new habit to be built up, a new default to be set in. This can happen when we are able to define our actions as things we will do positively until we are able to create a new habit out of it. It is in doing this that we fail next.

This is because we define what we want to do in such creative detail. We think that having specific tasks to do and doing them in a pre-defined manner can help us stick to our resolutions. In the process, we define what we seek to do with such rigidity that slipping up is easy. These then lead to disappointments.

Our brain recognises reward and punishment or pain easily. It seeks the reward and dislikes the pain. If new actions do not result in pleasure or positive outcomes, we find it difficult to keep the motivation. We thus slip back to the old default. Our resolutions demand that we do something different, which we cannot think about or execute in complete disassociation with our earlier positions, setting ourselves to fail.

Can we do something to stick to our resolutions? Let's use examples from personal finance. Assume our resolutions are that we would limit the use of the credit card, not get into new debt, spend less, save more and invest systematically.

Whipping out the credit card and swiping it to satisfy our need to spend has been our default. We want to reset this. If we make resolutions that involve the credit card, such as limiting the use of the card to a pre-specified amount, or restrictions on the number of times we go out, or holding ourselves back before we buy something, all these resolutions link back to the old habits we had, and require much higher mental abilities to cut off from our earlier default positions.

What would work instead is to switch from the credit card to the debit card, after setting up a daily drawing limit and an SMS alert after its use. We now have a new habit to build, where we spend what is already in the bank and the balance drops as we spend. The pleasure of spending is controlled by the immediate pain of paying for it, the consequences being visible immediately on the bank balance. We thus enable a new pathway in the brain that connects the spend with the bank balance, reinforcing a new habit to spend within means. We have a higher probability of success with our new spending resolutions.

If we resolve to get out of debt by telling ourselves that we will not borrow more, we continue to think about borrowing, drawing on the same impulses to seek debt. Focusing on what we already have and can enjoy more redirects the attention to using things rather than acquiring them. Take the time to maintain and drive the car you have, the home you own, than thinking about the new one you think you should buy taking on a higher EMI. The more you redirect your thinking, the better off you would be.

Saving is a painful decision for many. It represents denying oneself the pleasures of spending. Money that is set aside for an unknown future can be instead deployed to enjoy something in the present. The brain cannot trade off the immediate joy for a distant good very easily. Many of us make a virtue of living for the present, to guise our inability to save. Unless we are able to imagine the saving to represent something more attractive and desirable, and much better than spending, we will keep losing that battle. Investing is a long term activity that does not show up gains too soon to keep us motivated.

Saving and investing are habits that can be developed only if we are able to systematically weigh long-term benefits over short-term gratifications. If we set up a debit from our incomes towards an investment in a SIP, PPF, NPS, VPF or even a simple fixed deposit, we modify the default from spending to saving. We have for spending only what remains after saving. With time we adjust to the new normal.

The trick thus is to think about that beautiful morning, the dew, the bird songs, the fresh air and everything that waking up early allows us to enjoy. These joys slowly rewire our default to waking up. Merely resolving to wake up, while thinking always about sleep, won't help.

Author is chairperson, Centre For Investment Education And Learning.

Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of
This article appeared in Economic Times dated Jan 15, 2018, 06.30 AM IST

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