Why a set-and-forget savings system still helps limit irrational spending

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

In other words, since we are likely to let a previous decision prevent us from having to make a new decision, we can benefit from our own habits of procrastination or unwillingness to step out of our comfort zone.

“For example, someone who is trying to limit overspending can be compared to someone who leads a healthy lifestyle by not keeping bagels or ice cream in their house as a prior commitment to eating better. Since getting the treats requires leaving the house, the prior commitment not to buy them can often be enough to keep sweets from entering your diet,” said Raúl. “The same applies to curbing impulsive spending as well.”

Prior commitments can also help align your long-term goals with your short-term decisions. Here’s what Dr. Daniel Crosby, a renowned psychologist and behavioral finance expert and author of the New York Times best-selling book, The Behavioral Investor, says:

“A prior commitment should be used whenever we feel our short-term preferences may change, but our hope is that our long-term commitments reflect our current state of mind.”

What this means is that anyone looking to spend less, make rational investment choices or pay off debt could benefit from the creation of pre-commitment mechanisms.

There are several ways to create a pre-commitment mechanism to keep you on track to achieving your financial goals.

“Many successful budgeters blog about their journey out of debt or toward financial independence. These budgeters are precommitting themselves to the social consequences if they fall off the debt repayment bandwagon,” explained Griffin.

“The negative social consequences of reneging on publicly stated goals are much stronger than the immediate temptation to spend, which helps those who share their goals publicly stay on track.”

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

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

“By setting up automatic alerts, the consequences of having to explain your purchase can be enough to give you pause before buying anything,” added Raúl. “That’s why higher spenders are often advised to find accountability partners or blog their journey.”

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

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

“Similarly, removing your payment information from your favorite online retail sites, unsubscribing from retailer email newsletters, and immediately recycling the paper catalogs you receive can help you avoid the siren of the expense”.

While setting up pre-commitment mechanisms can go a long way toward improving your financial life, they aren’t magic.

“A pre-commitment that can be undone will be undone if you find it easy to change your commitment when you feel tempted, and there is evidence that rules-based pre-commitment strategies often do little to prevent investors from reacting emotionally, so it is not foolproof” , Griffin warned.

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

The bottom line is to overcome your temptations by limiting overspending. Prior commitments can help protect you from making simple, habitual, emotional, or thoughtless decisions.

“Your precommitments will be more effective if you know what temptations are most likely to affect you, and if you make it difficult to change your precommitments, so you overcome your worst impulses before you have a chance to accept them,” Raul said. .

So while shopping temptations can easily lead to impulsive spending, you can satisfy these urges simply by taking a break. “Once you pause, put some space between you and your impulse so that you can observe your impulses from an objective point of view,” added Raúl.

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

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