What happens when you get paid $5,000? If you don’t divide the money, you’ll spend it all, says Dan Ariely, a Duke University professor and author of Dollars And Sense (How We Misthink Money And How To Spend Smarter) and a proponent of goals-based investing.
His advice: The day you get paid, divide it 100% among goals.
Ariely, 51, recently opened a checking account and three savings accounts at Qapital, a Fintech bank where he moonlights as chief behavioral economist. Each week (on Mondays), he automatically puts a weekly spending allowance in his checking account that gets loaded onto a debit card and funds his savings accounts: one for his next car, one for next year’s travels, and the other for his 55th birthday. (Separately, he automatically defers pay into a 403(b) retirement account.)
Why weekly? By switching from a monthly spending goal to a weekly spending goal, people buy in more moderation, he’s found. Why Monday? People spend more on the weekends, so if you start on Friday, you might run out of money before the week’s end. If there’s money left over, you can decide which goal to beef up.
“The world is trying to derail you from your objectives,” Ariely says. “Setting up goals and automatic savings helps make the flow of money consistent with our agenda for now and later.”
Qapital offers portfolios that match the length of the goal with how to invest. Ariely’s birthday account is invested the most aggressively: “I can live with a small amount or a big amount. I can have friends to dinner or go to Machu Picchu,” he says.
What’s the advantage of the goals-based approach? It helps temper spending. If you see a $1,000 jacket and you have to take money out of your travel account to buy it, you might think twice. By contrast, if you keep putting your whole paycheck in your checking account, you might feel rich, and buy the jacket without really thinking it through, Ariely says. These trade-offs are important at all wealth levels because even if someone is thinking of buying a yacht, that impacts how much they might give to charity or leave to their kids.
“Having your own goals is about being explicit about your priorities and being explicit about how you violate your priorities,” Ariely says. “It’s all about opportunity cost.”
When you think about the goal, it’s not just about the money, rather, “it’s about redirecting our efforts,” Ariely says. In one study where college savings accounts were randomly opened for newborns, those with the accounts tested better on social and cognitive skills. Parents apparently treated these kids differently, as college bound.
Need help defining goals? Ariely suggests looking at your credit card spending from last year, and ask yourself, to what extent you spent your paycheck in the way you wanted. If it wasn’t, say you spent more than you imagined on clothes and didn’t take that trip you’ve dreamed about, create a goal-based account, in this case for travel. That will help you stay more connected to the way you want to spend your money.
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