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Learning how to automate your finances has the potential to be a money game-changer.
Why? Because on a daily basis, we face too many choices. Using automation to reduce choices sets you up for success with money, without even having to think about it on a daily basis.
Why is automating your finances important?
Think about the 50+ money decisions you have to make today: Should you save more? What should you cut down on? What about investing – real estate or stocks or index funds? Pay off debt? Did you send in that Comcast bill on time ? Is it time to rebalance your portfolio?
Faced with an overwhelming number of choices, most people respond in the same way: They do nothing. As Barry Schwartz wrote in The Paradox of Choice: Why More is Less,
“…as the number of mutual funds in a 401(k) plan offered to employees goes up, the likelihood that they will choose a fund — any fund — goes down. For every 10 funds added to the array of options, the rate of Participation drops 2 percent. And for those who do invest, added fund options increase the chances that employees will invest in ultraconservative money-market funds.”
Why do so many people believe that personal finance is only about willpower? The idea goes like this: “If I just try harder, I’ll start saving more, pay off my debt, stop spending all that money, keep a budget, learn about investing, start investing, rebalance every year…” Unlikely. In fact, go ask your friends if they’re taking full advantage of their employer’s 401(k) match. The vast majority of people are not – even though it’s literally free money . Their answer? “Yeah…I really should do that…”
It’s not about willpower. More than anything else, the psychology of automation is critical to successfully getting control of your finances.
In one study, researchers found that making 401(k) accounts opt-out instead of opt-in — in other words, making employees automatically participate,…
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