What were your New Year’s resolutions?
Research regularly shows one of the most common resolutions people make is money related.
Every summer we think – OK, in January I’ll get serious about saving and getting my finances in order.
But most of us abandon our goals by mid-February.
It’s a rare person who can turn a New Year’s resolution into a life-changing habit without help.
So why not try something new this year and ask for help?
When was the last time you had a coach?
Michael Lewis, the best-selling author of The Big Short and Moneyball (both of which were turned into Hollywood films), asked that question recently in his podcast series, Against the Rules.
In an episode called The Invisible Coach, Lewis examined the tricks financial corporations use to keep their customers trapped in cycles of debt with credit cards and other products.
He wondered if the average consumer ought to have regular coaching to help them make better financial decisions.
Why? Because most of us aren’t taught how to handle money very well.
We know we should save more and pay off our debts, but we often make poor financial decisions without knowing it.
It might seem like a good idea at the time to get a credit card, but that single decision can lead to a host of other problems you hadn’t considered, and those problems can compound and metastasise.
Do you have the skills to dig your way out of a serious financial hole while meeting all of your other financial commitments?
Consumer finance is a competitive sport
“You have to stop thinking of finance as a business, and start thinking of it as a competitive sport,” Lewis said in his podcast.
He said when you’re young and you get your first credit card, or your first personal loan, you’re walking into an arena alone with a target on your back.
The giant companies you’re facing off against – major banks and credit card companies – know more about your game than you do, and they make their money from exploiting your weaknesses, he said.
“You can always make more money exploiting people’s irrationalities than you can by fixing them,” Professor Richard Thaler, a winner of the Nobel Memorial Prize in Economics, told Lewis in his podcast.
Professor Thaler, an expert in behavioural economics, has spent his career researching the reasons why people make decisions that aren’t in their best interests.
After a lifetime of study, he’s concluded that if you want people to change their behaviour, you have to make it easy for them.
Cashew nut experiment
Professor Thaler is famous for the cashew nut experiment, where dinner guests are given access to a bowl of cashews while they wait for their dinner to be prepared.
Even though people know they’re about to eat a large meal, the experiment shows they often can’t stop picking away at the cashews unless the temptation is removed altogether and the bowl is taken to the kitchen, which they’re thankful for.
Professor Thaler’s observation in the experiment informed his work in behavioural economics.
He’s shown we tend to make short-term decisions without thinking of the long-term consequences, no matter if it’s spoiling our dinner or spending money.
We need someone to take the financial cashews away from us.
Time to get a financial coach?
Lewis, who famously provided one of the clearest explanations of the global financial crisis in his book The Big Short, has used his podcast to turn attention to the consumer finance industry in the United States.
He explains why, even when someone manages to eradicate an overbearing debt, they can still struggle to make their daily finances work.
Most people were never taught how to handle money well, he says.
He suggests we could all benefit from coaching.
Getting nudged in the right direction
For people struggling with their finances, one thing they have in common is knowing how to start fixing their situation.
Scott Pape, better known as the Barefoot Investor, has made his name in Australia with his popular financial self-help books that provide easy step-by-step general guides to getting on top of your finances.
Pape says the trick to getting your finances in order is to stop buying things you don’t need, to stop spending more than your income, and to arrange your direct debit payments and saving measures so everything is on autopilot.
It sounds easy, but if it was, we would all be doing it already.
Pape tells his readers to set up four bank accounts, and to think of each bank account like a “bucket” into which a certain amount of their regular income will flow each pay cycle.
It’s similar to the envelope system, but it automates your direct debit payments and spending limits so you limit the number of financial decisions you have to make each month.
Once the basic system is set up, you’ll be paying your bills, saving some money, and paying down your debts over time.
From a behavioural economics perspective, Pape wants you to set up a system that takes the bowl of cashews into the kitchen.
It’s a general system that won’t suit everybody’s financial situation, but he’s proven there’s huge demand for simple financial coaching.
His book has been a publishing phenomenon in Australia, with more than 1.9 million copies sold.
It’s not just Pape’s book, either.
The Commonwealth government’s MoneySmart website, which offers free financial guidance on everything from how to manage your money, how to reduce debt, and how to plan for your future, regularly gets 1.5 million visits a month.
A financial coach in your pocket?
In his podcast, Lewis spoke to the creator of an online company called Tally (based in the US), which works on similar principles to Pape’s bucket system but takes it one step further.
Tally has staff to help customers get their financial life in order, and they essentially take control of their customers’ finances, to pay down debts on their behalf and start accumulating savings for them.
Jason Brown, the chief executive and founder of Tally, said his mum used the old-fashioned envelope system and he often saw those envelopes become empty too quickly. She rarely had savings, and never got ahead.
Mr Brown said a good financial coach should help people change their behaviour by making it as easy as possible to do so.
He said his company had a 99 per cent retention rate – meaning once people signed up to the service, they almost all stayed.
Professor Thaler’s research suggests that would make sense, because people lack control and often benefit from automating good decisions and restricting the opportunities to make bad decisions.
Is it time to get a financial coach?
We’re most likely to experience coaching when we’re children, not when we’re adults.
That’s strange if you think about it.
Whatever it was – swimming lessons, music lessons, maths tutoring, cricket coaching – when we were younger, we were told that coaches were there to teach us important skills and help us improve our performance at various tasks.
By the time we’re adults, most of us stop receiving coaching, except for health-related activities (we’re still happy to ask for help from yoga, pilates and cross-fit instructors, for example).
But why don’t we have regular coaching, as adults, for one of the most important things in our lives – how to improve our financial situation?