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The average American is in poor financial health.
Those with credit cards carry more than $5,500 in debt and, according to the American Psychological Association, 81% of Americans say that money is a significant source of stress in their lives.
Despite the struggle, the basics of personal finance are actually simple. Save for the future and don’t spend more than you make.
Yet this is exactly where most fall short. We know better but we can’t do better. The standard advice, such as budgeting and avoiding lattes, is not very effective in changing behavior. It turns out that lattes are quite delicious.
So how can we be inspired to save more?
This question led to a study published this month in the Journal of Financial Planning, conducted in five cities across the country. We packed a variety of financial psychology techniques into a 60- to 90-minute session and tracked participants’ savings as a percentage of gross income before the session and one month after.
The result? Participants in the financial psychology group increased their savings rates. Overall, they saved more than 17% of their income, up from 10%.
Here are five themes we used in the study that can help consumers harness the power of financial psychology to crush their savings goals:
• Identify three financial goals: Sit back, close your eyes and picture your ideal life 5, 10 or 20 years from now. Where are you? Who are you with? What are you doing? Where do you live? How does it feel?
Now take a moment to write down your top three financial goals, goals that will help you create your ideal life. Do you want to buy a house? A car? Enjoy an early retirement? Make sure you are passionate about these goals. If you can’t rank each as a 9 or 10 on an excitement scale of 1 to 10, pick a different one.
• Name your financial goals: There’s nothing less inspiring than an amorphous “savings account” and cutting out the joy in your life to fund it. Savings accounts are boring. Nothing to get excited about. We need to give our financial goals specific, exciting names that conjure up images and feelings that thrill us.
For example, instead of a vacation, name your goal a “Family European Vacation.” Instead of “retirement” call it your “Financial Freedom Fund.” Link your passion and excitement to the financial goal by naming it. Many banks now let you divide your savings account into sub-accounts you can name, and you can direct money to each of them.
• Time-stamp your goals: Go back to your goal and add in a date by which you want to achieve it. In this case, your “Family European Vacation” goal becomes your “2020 Family European Vacation” and your “Financial Freedom Fund” would be “Financial Freedom at 50 Fund.”
• Picture your financial goals: This is where it gets fun. In this step, imagine you’re back in kindergarten. Find a way to create visual reminders of your savings goals. In our study, we had people use a poster board and draw words, images, and/or cut out magazine pictures and glue them on. If you’re serious about achieving your goals, it’s worth a trip to the arts and crafts section of a store to pick up a poster board and supplies. Take time to create visual representations of your financial goals. Have fun.
When you are done, keep this visual reminder close to you. Hang it on your wall. Take a picture of it and use it as the wallpaper on your phone. These visual reminders are incredibly powerful and will help keep you focused on what matters most.
• Automate your success: Now that you’ve got a clear picture of what you want, capitalize on your clarity and passion to automate your success. Automation harnesses our “status quo” bias — our natural tendency to keep things the way they are.
Ride the wave of your excitement and set up automatic payments. For your savings goals, set up automatic monthly transfers from your checking account to your sub-savings accounts. If your goal is early retirement, research your options — such as a 401(k) plan or individual retirement account — and set up automatic payments, some of which could be taken directly from your paycheck.
You may surprise yourself at how easily you can adjust as your income shifts since you are taking care of what matters most. Before you know it, you will have made major progress towards your goals.
Executing on these powerful steps can significantly increase your ability to achieve your financial goals.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.
—By Dr. Brad Klontz, certified financial planner, financial psychologist and an associate professor of practice in financial psychology and behavioral finance at Creighton University Heider College of Business.