When it comes to maintaining healthy financial habits, especially those related to long-term goals, it can be challenging. However, small changes can be made to “nudge” us towards financial wellness.
In the field of behavioral economics, which analyzes how people make choices, small modifications that alter our default behavior are known as “default nudges.” Automation allows us to enforce our intentions and priorities, creating a barrier for spending decisions that do not align with our goals.
3 ways to develop healthy habits automatically:
1. Achieve your savings goals by setting up automatic deposits for your savings account.
As Warren Buffet, the legendary investor, stated, “Don’t save what is left after spending; spend what is left after saving.” Determine a savings goal and decide what percentage of your income should go towards that goal in each pay period. By automatically transferring that money into your savings account whenever you get paid, it becomes easier to achieve your savings goals and less tempting to spend that money on other things.
2. Simplify bill payments, save time, and avoid late fees by setting up automatic bill payments.
Another simple way to automate your financial life is to set up auto-payments for your bills. If you have recurring bills that you budget for every month (like a cell phone bill or a monthly loan payment), you can use auto-pay to ensure those bills are always paid on time. If you have the option to choose your payment dates, set them up shortly after your paycheck is deposited into your checking account.
By withdrawing savings and paying bills early in the month, you will have a clearer understanding of what funds are available for other expenses. Additionally, you will never have to worry about late fees again!
3. Plan ahead and maximize your tax benefits by enrolling in automatic contributions to a retirement account.
If your employer offers a retirement plan, such as a 401(k) or 403(b), sign up to have your contributions automatically deducted from each paycheck. These plans allocate a portion of your pre-tax income to a retirement account, reducing your taxable income during your working years and growing your long-term savings to provide income during retirement. If you do not have access to a retirement account through your employer, you can make automatic contributions to an IRA account instead. By automatically depositing a portion of your paycheck into a retirement account, the money never enters your checking account, reducing the temptation to use it elsewhere.
