How To Outsmart Your Brain and Be Better With Your Money? | CareerMetis.com

The first time I learned about the status quo bias — a behavioral economics theory which suggests that people prefer when things stay the same — I underestimated how important it was.

Of course, we like it when things stay the same, I thought. That’s why, when given the choice to do something or to do nothing, we often opt for the latter. We’re generally happy (or at least comfortable) with the way things are.

But I was sure that if a decision was important enough (or if taking action could help someone get what they want out of life), the status quo bias would be tossed right out the window.

Wow, was I wrong.

Like many people, I once stayed in a job with limited growth potential for far longer than I should have. In fact, looking back, I can identify multiple times throughout my career when I choose the status quo over change — even when I knew change was necessary for achieving my goals.

And working in financial planning (where colleagues, bosses and clients tend to be especially wary of risk), it wasn’t hard to notice how the status quo bias affected other people’s decision-making in the same way that I had come to realize it was affecting my own.

Richard Thaler, a professor of behavioral science and economics at the University of Chicago, writes about the status quo bias in his book Nudge:

“…people have a more general tendency to stick with their current situation. […] Most teachers know that students tend to sit in the same seats in class, even without a seating chart. But status quo bias can occur even when the stakes are much larger, and it can get us into a lot of trouble.”

Overcoming the Status Quo Bias in Financial Planning

A behavior bias is something that’s ingrained in how we think and act. Therefore, to overcome a bias we have to think and act differently than what comes naturally. This can often be accomplished with a good question or a new way of looking at a problem.

As we make thousands of decisions every day, the goal isn’t to get every decision right. Instead, it’s to give ourselves that flash of clarity that, when acted upon, can help us get closer to what we want in life.

In this article, I want to provide some insights and strategies for overcoming the status quo bias in your expenses, investments and career.

#1 — Your Expenses

The trick to avoiding status quo bias when it comes to your expenses is using zero-based budgeting. The concept is simple: each month, you must justify and approve of each expense.

This practice is gaining traction in the corporate world, where managers must build their budgets from zero each month, quarter or year, making sure that each expense is the most efficient and effective use of company money.

In contrast, the traditional approach is to take last year’s expenses and add a few percentage points for wage increases and inflation. That can be a costly mistake.

According to the management consulting firm Mckinsey, companies that justify every expense every month typically achieve a 10% to 25% reduction in costs within six months of switching to a zero-based strategy.

On the personal finance side, users of the popular zero-based budgeting tool YNAB saved $600 on average by month two, and more than $6,000 on average in their first year, according to the company behind the product.

Keep in mind, the goal isn’t to eliminate each expense and pare your budget down to the bare bones. Instead, it’s to recognize when a past decision no longer makes sense today.

Are you getting your money’s worth from each subscription or membership you pay for? Does the amount of insurance you have make sense? Are you actually making the expenses you say are important — whether that’s paying off debt or saving for a home — a priority?

It’s not easy going through such a rigorous process every month. But life circumstances and goals change, whether we like it or not. If you want to adapt and succeed, it’s important that you’re willing to change as well.


#2 — Your Investments

Most investors know what an ideal portfolio looks like.

An ideal portfolio:
  • Has the proper asset allocation
  • Invests for tax efficiency (asset location)
  • Minimizes fees

Does this sound like your current portfolio?

Maybe there are legitimate excuses for why you haven’t been contributing up to your company’s maximum 401(k) match, or why you’ve been holding a high proportion of cash. If so, do those reasons still make sense today?

It’s also important to periodically reevaluate your investing goals. While retirement is always a top priority, has anything else changed that would lead you to tweak your asset allocation?

What’s nice about investing is that it often only requires one good upfront decision. The right asset allocation doesn’t need to be something you worry about every month. Making the decision to use your 401(k)’s auto-escalation feature allows you to increase your savings rate without even logging in. The same can be said about setting up a regular withdrawal from a checking account to an IRA — it only takes a few minutes. In both circumstances, you’re making one good decision that you’ll benefit from for years to come.

When it comes to investing, it’s best to automate as much as you can. Then, at least once a year, reevaluate your system to ensure it still reflects your current priorities.


#3 — Your Career

Changing your career — whether that encompasses changing your job, your industry, the way you go about your work, or all the above — can turn your life upside down. And since we don’t like change, that thought can be terrifying.

When it comes to our careers, a lot can change in very little time. Ideally, your knowledge and skills will evolve with these changes. As such, is the path you’re currently on the best path to accomplish your career goals?

Just as there’s zero-based budgeting to make sure you’re spending your money in the right places, there’s zero-based thinking. I first learned of this concept from the famed business strategist Brian Tracy.

Tracy has you ask yourself an eye-opening question that can be applied to all aspects of life:

“Is there anything in my life that, knowing what I now know, I would not start up again today, if I had to do it over?”

Would you take your current job, knowing what you know now?

Would you have spent your time differently, knowing what you know now?

For me, this question provided the spark to change careers. My life had changed a lot since I started working at a Certified Financial Planner®. What was important to me back then was a lot different than what’s important to me now.

The biggest change was having kids and wanting to spend more time with them. I wanted to find a way to work online from home with flexible hours so that I could maximize the time I get with my family.



Summing Things Up

Life changes fast. We may have gained new knowledge, or what was important last month or last year might not be so important today.

Yet, acting upon these new insights, even when they’ll improve our life, isn’t something that’s natural for us.

That’s why it’s so important to take a step back periodically and examine what you’re doing.

Written By
R.J. Weiss is the founder and editor of The Ways To Wealth, a Certified Financial Planner, husband and father of three. He's spent the last 10+ years writing about personal finance and has been featured in Forbes, Bloomberg, MSN Money, and other publications.

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