When I was the editor of the Center for Financial Insight investor education blog, we received enough wonderful questions from investors and ideas from planners that it’s difficult to remember them all. One that has always stuck with me, however, is “If you only had time to offer a novice saver or investor a single tip, what would it be?”
It’s a great question, and given the sheer volume of content out there for investors to consume and the many intricacies involved in saving and investing, a tricky one to answer. In my opinion, if you strip away all the ancillary layers and pieces, the ability to put away money now to use at some point in the future is a matter of discipline. Foundational concept though it may be, attaining the level of discipline required to save enough money to buy a new car, much less live 30+ years in retirement, can be extremely difficult.
In this article, I want to shed some light on the concept of discipline, in the hope that you can use the content to help your clients take important steps toward executing a savings plan, or to do their part to ramp up their efforts in meeting their most important financial goals.
Discipline is a Learned Behavior
One of the fundamental learnings of behavioral finance is that our brains do their best to make it difficult for us to save money. Our brains are so hardwired to help us stay alive in the present, that we are actually unable to see ourselves as any older than we are in the present moment (without the help of computer software). In fact, according to research in the latest issue of the Journal of Financial Planning, some people see their older selves as entirely different people.
The next time you have a dream about the future, you may notice that, while your brain will age all of the other participants in the dream, you will still look exactly the same. So how important is the psychological connection to our future self in terms of our propensity to save?
An academic study completed in 2011 for the National Institutes of Health tested the difference in hypothetical retirement allocations between participants who viewed only an image of their current self and those who were exposed to an age-progressed avatar of their future self. The results were astonishing, as those participants who viewed their future avatars in virtual reality allocated more than twice as much money toward the retirement account than those who were not.
One quote from the study effectively sums up the psychological phenomenon, termed temporal discounting: “To those estranged from their future selves, saving is like a choice between spending money today or giving it to a stranger years from now.”
I think the data from the study is the best representation of what we’re really up against. Because our brains are actively trying to hinder our progress, the discipline required to take money away from our current selves to provide it to a “stranger from the future” will be a constant struggle and the polar opposite of an innate behavior. Success in attaining this discipline, it seems, will be the product of a lifetime of learning.
So How Does This Help Your Clients?
First, it lets us know that, while some people may naturally be better at putting money away than others, it’s not because those people are genetically predisposed to be “savers.” On the other side of the coin, we cannot say that we have lost the genetic lottery in terms of discipline. Knowing that we are all on a level playing field when it comes to our brain’s assessment of the future puts the onus directly on each of us to teach ourselves to save.
Second, the fact that discipline is a learned behavior provides us with a valuable frame of reference. Your clients likely have one or more areas of their lives that they have already conquered using discipline. Whether it’s making themselves get up and go for a run every morning, eating a protein bar instead of a doughnut for breakfast or studying toward a certification or degree instead of watching Game of Thrones, they know what it takes to harness their willpower, and saving money is no different.
Finally, I have found that, psychologically, it makes a positive difference when you can distill different areas of something extremely complex like the investment world down to a relatively simplistic idea or routine. It’s easy to become overwhelmed with the glut of content out there, and the ever-increasing amount of tips, tricks and things investors and savers “need to know” about the next big investing product or strategy.
I find it to be a welcome breath of fresh air to be able to focus on something that you can control, and I believe your clients will as well.
Discipline is Different for Everyone—Your Clients Need to Make It Their Own
Discipline means different things to different people, depending on context and a variety of different factors. For those who have children, it likely often means “time out” or another type of punishment for wrongdoing. For those in the military, it may mean a life-long commitment to training that develops self-control, character and efficiency (i.e., being able to “bounce a quarter off that bunk”). For those working in a hazardous environment, such as a nuclear power plant or an oil rig, adherence to discipline and routine could mean the difference between life and death. The point being, there is no “right” way to institute discipline across the board, especially when it comes to anything that requires a large amount of self-discipline.
Thus, in the context of saving, it’s very important for clients to understand the type of discipline to which they best respond. Otherwise, the prospect of beginning to put money away may be so unsavory that they never start in the first place. To begin thinking about the discipline style that might work for each client, helping them answer the following question can be a good place to start: “Using recent life experiences as examples, are you an individual who performs more effectively under the potential for reward or the possibility of punishment?”
This question was an easy one for me, as I am a reward man through and through. I get up in the morning to go to the gym primarily because I will compensate myself with a dessert later that evening. During hockey season, when I get home from work, I do all of my chores right away, as I will then deserve the gift of watching the game that evening.
Would I eat dessert and watch the hockey game anyway? Possibly, but I have taught myself to look at these luxuries as rewards based on certain triggers, and as a result, I consistently feel a sense of accomplishment and happiness when the pattern is completed. My reward scenarios are both good examples of classical conditioning; to cite a more ubiquitous example, one only needs to look to Ivan Pavlov and his research on salivation using his now-famous canines.
In his study, Pavlov set out to provoke a conditioned response to a previously neutral stimulus which, in his case, was a metronome (a device that produces regular, metrical ticks, often used by musicians to keep time). Pavlov would expose his dogs to the ticking metronome, then present food to the animals immediately afterward, with the result that the dogs began salivating when hearing the metronome in the expectation of food. Thus, the neutral stimulus (the metronome) became a conditioned stimulus, with a conditioned response (salivation).
Pavlov’s experiment provides us with another useful tenet of behavioral psychology, and the basis for a way to manufacture discipline in the context of saving. If you can build in a reward for putting money away on a weekly or monthly basis, even in small increments, it may be possible to condition yourself to begin treating the saving as a routine (as you likely already do in other areas of your life).
If your clients are on the opposite side of the spectrum, and they know that they will be more likely to make headway under the threat of punishment, there is actually a scientific basis for their behavioral model as well.
The idea was first introduced by behaviorist B.F. Skinner as part of his theory of operant conditioning, which is a method of learning in which we associate a certain behavior with a certain consequence. As part of the theory, Skinner split punishment into two different types: positive punishment, which introduces an averse stimulus after a certain behavior (i.e., your boss lectures you after sending an email with errors to a client), and negative punishment, which involves taking away a desirable stimulus after a behavior has occurred.
For your clients’ part, they just need to decide which one works for them, or if a combination of the two might be best. In the context of saving, an example of negative punishment might be to punish themselves for not putting away the required monthly amount by choosing to forgo a luxury purchase (i.e., new shoes they don’t really need, tickets to the baseball game, etc.).
In terms of positive punishment, they might print out a piece of paper with their savings shortfall displayed in large font, and put it up on their refrigerator for a few weeks to help them remember to hit their goal in the next month.
If attaining discipline in every aspect of our lives was easy, then we would all be in professional athlete-level-shape and every one of us would retire with millions of dollars in our coffers. Your clients who are already doing well saving deserve congratulations, as it’s far from easy to begin and even more difficult to sustain. It may help to let struggling clients know that, once they get started in earnest, it will be much easier to keep going, and not to worry if they only save small increments at the beginning.
Every little bit helps, and even making small adjustments and adding seemingly minor items to their routines can help clients attain a level of discipline. For example, if they’re not already automating deposits into a savings account, it’s one of the easiest ways to manufacture discipline (as you rarely miss the money in your daily budget, especially when creating an automated savings strategy after a raise, promotion or other recurring windfall).
If they aren’t willing or ready to automate their saving strategy, phone or tablet reminders can be a great way to stay on top of their plan, especially if they are making one transfer per week or month. I would also urge you to help clients avoid ruling out a good, old-fashioned pen on paper reminder on the fridge or under their phone on the nightstand. According to a 2014 study, students who took and had a chance to review longhand notes actually scored better on tests than those who took notes and reviewed them on a laptop.
Dan Martin is the Director of Marketing for the Financial Planning Association, the principal professional organization for CERTIFIED FINANCIAL PLANNERTM (CFP®) professionals, educators, financial services professionals and students who seek advancement in a growing, dynamic profession. You can follow Dan on Twitter at @DanW_Martin and on LinkedIn at www.linkedin.com/in/danmartinmarketing.