Money Psychology: How a “pre-commitment” system helps many people limit overspending

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Dubai: Pre-commitment, or foregoing a future choice, is a mechanism for overcoming impulsiveness. This also applies to impetuous spending, and behavioral economists explain how.

“Pre-commitment mechanisms can be powerful tools to help people overcome impulsive behavior, and overspending in particular,” explained Matthew Griffin, a behavioral economist based in the UK.

What are these “pre-engagement mechanisms”?

A potential solution to impulsiveness, whether it’s spending or otherwise, is what’s commonly referred to as pre-commitment, where we set things up today to eliminate possible slippage tomorrow.

For example, the “set-and-forget” savings system, where you link daily purchases to your savings accounts and set rules to automatically spend a set amount, then forget about it.

Money psychologists explain how learning to help yourself before you commit can help you avoid temptation and get things done that need to be done. Here’s what you need to know about pre-engagement mechanisms and how you can incorporate them into your financial decisions.

Why do pre-commitments work?

“Pre-commitment works because it takes natural (and sometimes negative) human tendencies like the status quo bias and makes them work for us,” said Dubai-based financial coach Mirin Raul, referring to the bias used. to explain why people don’t take it. take advantage of savings opportunities.

In other words, since we are likely to let a previous decision stand if it saves us from having to make a new decision, we can take advantage of our own habits of procrastination or not wanting to step out of our comfort zone.

“For example, someone trying to limit overspending can be compared to someone living a healthy lifestyle by not keeping donuts or ice cream at home as a prior commitment to eat better. Since getting the treats requires leaving the house, the prior commitment not to buy them can often be enough to exclude sweets from their diet,” Raul said. “The same goes for curbing impulse spending.”

Someone who tries to limit overspending can be compared to someone who leads a healthy lifestyle by not keeping donuts or ice cream at home as a prior commitment to eat better.

How can pre-commitments help?

Pre-commitments can also help align your long-term goals with your short-term decisions. Here’s what Dr. Daniel Crosby, renowned psychologist and behavioral finance expert and author of the New York Times bestseller, “The Behavioral Investor,” said:

“A pre-commitment should be used whenever we feel our short-term preferences may change, but we expect our long-term commitments to reflect our current mindset.”

This means that anyone who wants to spend less, make rational investment choices, or pay down debt could benefit from creating pre-commitment mechanisms.

What does a pre-engagement mechanism look like?

There are several ways to create a pre-commitment mechanism to help you achieve your financial goals.

“Many successful bloggers talk about their journey to getting out of debt or to financial independence. These budgeters pre-commit to the social consequences if they were to jump off the debt-repayment bandwagon,” explained Griffin.

A pre-commitment should be used whenever we think our short-term preferences may change

-Daniel Crosby

“The negative social consequences of denying publicly stated goals are far stronger than the immediate temptation to spend, helping those who publicly share their goals stay on track.”

How pre-engagement helps improve consumer habits

There are several ways to use consequences as a pre-commitment to improving your spending habits.

For example, you can set up an automated alert from your bank or credit card issuer that sends you an SMS whenever you make a transaction over a certain amount.

“When setting up automatic alerts, the consequences of having to explain your purchase may be enough to cause you to pause before buying anything,” Raul added. “That’s why spenders are often advised to seek responsible partners or record their journey in a blog.”

How Automation Helps Develop a Savings Strategy

Automatically withdrawing your savings from your savings account allows you to pre-commit to a savings strategy that’s harder to undo. This automated decision allows you to benefit from your own reluctance to change the default setting.

“In fact, it allows a retirement saver to make a good one-time decision that benefits them for the lifetime of their savings. People are busy, their will is weak, and their decisions can be inconsistent. By “set and forget” decisions like saving money, human frailty has no say,” Griffin added.

expenses

Our spending can spiral out of control if we don’t strike the right balance between spending and saving.
Image Credit: Stock Photo/Pixabay

How effective is it to budget and save by eliminating temptations?

Another pre-commitment option is to modify your environment so that you encounter fewer temptations.

“That’s what the dieter does who doesn’t have treats at home. Reformed spenders can do the same by taking their credit card out of their wallet. There’s a very good reason for the advice to the old fashioned way of freezing your credit card in a block of ice,” Raul explained.

“Similarly, deleting your payment information from your favorite online shopping sites, unsubscribing from email newsletters, and immediately recycling the paper catalogs you receive can all help you avoid the siren song of spending. .”

When don’t all pre-commitments work for a saver or a budget?

While having pre-engagement mechanisms in place can do a lot to help you improve your financial life, they are not magic.

“A pre-commitment that can be canceled will be if it is easy for you to change your commitment when you feel tempted and it is proven that rules-based pre-commitment strategies often do not prevent investors to react emotionally – then it’s not foolproof,” Griffin warned.

Deleting your payment information from your favorite online shopping sites and unsubscribing from retail newsletters can help you avoid the spending siren song

– Mirin Raul

That’s why financial planners recommend making your pre-commitments hard to change. “Once you’ve made a commitment, you want it to be as hard as possible to change it. Make that choice and lose the key!” Griffin added.

At the end of the line ? Avoid your temptations to limit overspending

Prior commitments can help protect you from easy, habitual, emotional, or ill-thought-out decisions.

“Your pre-commitments will be more effective if you know which temptations are most likely to affect you, and if you make your pre-commitments hard to change, then foil your worst impulses before you have a chance to satisfy them,” said Raul said. .

So while buying temptations can easily lead to impulse spending, you can satisfy those impulse urges by simply taking a break. “Once you pause, you put space between you and your impulse so you can observe your cravings from an objective perspective,” Raul added.

Short-term goals like these can help fundamentally change the way you think about and use money. However, financial planners add that they can also be a bit of a challenge. “As you become more frugal and less impulsive, you can start setting longer-term goals for the future,” Griffin noted.

“So if you’re an overspender, you can curb the temptation to splurge by simply setting goals and putting safeguards in place, and you can slowly but surely transition from a chronic spender to a savvy consumer.”

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