Everything we’ve covered so far has helped your conscious mind better understand how to manage your money. You know the importance of starting early, the power of compound growth and the dangers of borrowing. However, unless you take specific steps, which we’ll cover shortly, you’re unlikely to reach your goals. This is because your conscious mind has little to do with your day-to-day decisions. Your spending habits form over time and then happen subconsciously, with little further thought. In the opening of this blog, I mentioned that one of the greatest challenges with personal finance is that we’re wired to be bad at it.

As a species, we’ve only been saving and investing for a short period of our existence. Saving for the future seems a lot less important if you don’t know if you’ll make it back to the cave alive at the end of a hunt. Over time, our subconscious mind built up a series of simplifications or shortcuts to make decisions easier and faster. Errors caused by these shortcuts are called cognitive biases. Most of the time, these biases aren’t an issue, and you’re still better off using the shortcuts, since they allow you to avoid thinking through every decision. However, when it comes to managing your money, these biases make your job much harder than it needs to be.

Hyperbolic Discounting

Delayed gratification requires putting off an immediate reward today in exchange for a greater reward in the future. This is a critical skill to develop both in life and for your financial success. However, this is more easily said than done. Setting aside money for the future is so hard because there’s such a salient benefit to spend it today. Meanwhile, the benefit of putting it aside for later is unclear. The challenge to delay gratification can be explained by a behavioural bias referred to as hyperbolic discounting. This bias applies an unreasonably high discount to rewards in the future.

Exhibit 46 – The following chart is an illustrative example of how your mind values a cookie depending on when it’s received.

The most important thing to observe is how quickly the perceived value drops. A reward today is much preferred to one tomorrow. However, this preference quickly slows, and a reward in a month isn’t much better than a reward in ten years. Knowing that you’re wired to act this way is an important step in taking control of your money.

Automate Your Savings

To mitigate the impact of hyperbolic discounting on your success, you can automate your savings. This removes the real-time decisions when you’re most likely to favour a reward today. As we mentioned in Chapter 1, you can set up an automatic transfer from your chequing account to your savings account. This can be done right as your paycheque is deposited each pay period to remove the temptation to spend it. From there, you can set up automatic investments to put the money out of sight and out of mind. Some financial institutions even allow you to request that these transfers increase in value over time automatically. This allows you to make financial decisions your future self will benefit from without having to give anything up today.

Celebrate the Wins

You can also give yourself small rewards along the way to make sure you’re satisfying your need for immediate gratification. Celebrations, like going for a nice dinner every few months if you stick to your plan, bring a nice balance. Another approach is to break your goals into smaller chunks that you can celebrate more regularly. A retirement plan doesn’t need to be a thirty-year grind without milestones. Reaching $1,000, $20,000 or $100,000 are significant achievements in and of themselves.

Stick to Your Plan

There’s a long list of biases you can mitigate with practice. For instance, people don’t like to lose. This shows up in a hesitation to invest due to a fear of losing money. It can also lead to the unfortunate situation that investors sell when the market is down, out of fear of losing more. We all overreact to the potential and reality of losing money. Therefore, to avoid making emotionally driven shortcut decisions, you should stick to the plan you set out. If this is to invest for twenty years, then avoid selling when markets drop. This allows your investments the chance to recover and continue to grow toward your goal. In addition to automating your savings, it’s important to automate your investment approach. Actively managing your investments can be emotionally draining. It also relies heavily on your subconscious mind, leaving you open to errors.

Motivation

An important aspect of setting aside savings is to remind yourself of the progress you’re making. You can keep track of balances to watch your wealth build over time, or you can review your long-term goals to remind yourself of what it’s all for. By reminding yourself of the final goal, you’ll make the future benefit of your work more real. Your goal may be to travel around the world or put your child through post-secondary education. Either way, it’s important to look past the dollars and cents to what it all really means.

Personal finance is a subject that spans the entirety of your life. As such, it’s not something you can work at for a few months and then stop. Your regular savings will provide for you well into the future, which is why persistence is so important. Regular reminders of the goals you’ve reached and progress you’ve made will help to keep you in the right state of mind.

Final Thoughts

The best way to remove the barriers of behavioural biases is automation. The less day-to-day involvement you have, the less opportunity there is for your subconscious mind to hijack your plans. Saving for the future is critical to ensure your standard of living doesn’t decrease over time. After all, though your subconscious mind doesn’t think a cookie next week is all that great, when it’s finally in your mouth, your taste buds will thank you.

Key Takeaways

• Your subconscious mind takes shortcuts to make decision-making easier.

• Mental shortcuts can lead to errors called biases that make managing your money more challenging.

• Automating your saving and investing is the best way to protect you from your subconscious mind.

This blog is a duplicate of the recently self-published book The Snowman’s Guide to Personal Finance available for purchase here.