If you have read the article about retirement crisis, you would have rightly concluded that it is in many ways a ‘savings crisis’. Here at Ten Factorial Rocks, we believe in earning more income as a better way to increase savings, but let’s face it – for many people, that’s not an immediate possibility. However, that’s the direction to put efforts in the long-term if you want to accelerate your journey to Financial Independence (FI). In the meanwhile, should you use ‘less income’ as an excuse to put off savings? Clearly, that’s not sustainable behavior. The 10! way is ‘devilish’ about both income and expenses, but in a sensible manner.
Human beings are, in the words of psychologists, ‘conditioned animals’. Various psychology experiments, starting from the famous Pavlovian dogs, have demonstrated that humans are creatures of conditioning. What we condition our minds and bodies to is what we believe as reality. If you have conditioned yourself to have breakfast at exactly 8 AM every morning, you will instinctively feel hungry when the clock strikes 8. You can watch this 4-minute video to understand how the famous Russian psychologist Ivan Pavlov discovered this behavior using dogs, now known as ‘Classical Conditioning’, though it’s not necessary for understanding this post.
Do you think as intelligent human beings, we are immune to this behavior? Think again! We are conditioned every day by messages from marketers on what is appropriate to eat, wear, travel and even choosing a partner. Years of exposure to these messages have conditioned our minds so much that we don’t ever think twice about our daily decisions. Our daily routine is filled with such conditioned behavior. Also, most of us have conditioned our minds to respond in predictable manner to common questions asked by our partners, children, boss and co-workers. Our brain uses conditioning as a ‘low energy’ way to get through our daily lives.
If you believe that the money credited into your checking account each month from your paycheck is spending money for your living expenses that month, then that’s exactly what will happen. You will continuously spend every dollar from your paycheck because that’s what is available in your checking account. If we do this for many months or years, then it automatically becomes our conditioned behavior. For those of us who are conditioned to spend all the money that hits our checking account each month, there is really no easy way to break this cycle of conditioning to start saving for the future.
Unless you do a trick!
The trick that follows works because it is designed to work with your already conditioned mind. Instead of changing your conditioning behavior, which is very difficult, it begins to work at the source of it utilizing its own weaknesses. I have suggested this trick to my friends and they tell me it has made an amazing difference in their financial lives.
Starting tomorrow, have your employer cut 20% of your post-tax income and authorize them to divert the money into a new investment account. They should automatically deduct this 20% and transfer automatically into your investment account, which you would separately authorize to again – automatically – put every deposit into a diversified, low cost stock index fund (like Vanguard Total Stock Market or Fidelity Spartan Total Market index funds). Don’t bother naming this fund (like ’emergency’ or ‘retirement’ etc.) as that will make this fund stick out in front of your mind, which you don’t want it to. You must structure your paperwork to forget this account even exists. Right now, the less you think about this account, the better. The remaining 80% of your paycheck goes into your checking account as usual.
Here’s the conditioning behavior you are already following: You are free to spend ALL the money that goes into your checking account. That stays the same as you have been doing for months or years. It’s just that the money going in has reduced. This could easily happen if your employer had fallen on bad times and have asked all employees to take a 20% pay cut to tide over for a year.
Necessity is the mother of invention, as the saying goes. When faced with spending only the money in your checking account (your conditioned behavior), your brain will now work in mysterious ways to start identifying expenses that can you can cut without help from anyone. Many of those ‘must haves’ will start to appear as ‘nice to haves’ or better yet, ‘not worth having’. Funnily, that’s how our brain works. When faced with extreme circumstances, at the precipice, we change!
You may feel the pain during the first month, but the second month will be a lot better. By the third month, this will become your conditioned behavior. Remember, your conditioned behavior hasn’t changed, only the quantum has, which is easier to adjust to than to a new behavior that many money gurus ask you to do – which is, to put money in your investment account after your paycheck has hit your checking account. Modified conditioned behavior is a lot easier than entirely new behavior. This is what our brains are hardwired to do, and that’s why this trick works for many people. Now, your employer must co-operate for this trick, which is to agree to split your paycheck into two parts and divert them to different accounts. Most employers allow it these days as a convenience for employees. This trick works well for those who don’t save enough in 401(k) or even don’t have pre-tax accounts, because of huge paperwork your company thrust on you when you joined that you never got around to reading (maybe the paperwork is still lying somewhere in your closet).
Here’s another variant of that trick to make this foolproof. Don’t sign up for any online access to your new investment account (or) if you do, lock away the username and password, never to use them for at least one year. This keeps the investment account out of your mind, which is supportive of your conditioned behavior (because you never had one at the beginning of the experiment!). After a year or more, when the conditioning of living on 80% of what you earn has set in, then you can login to your investment account to check the balance. At that time, you are unlikely to reverse course. At that stage, you are also ready to think about tracking your money or investing efficiently, which I will cover in a future post. Safe journey, my 10! friends.
Raman Venkatesh is the founder of Ten Factorial Rocks. Raman is a ‘Gen X’ corporate executive in his mid 40’s. In addition to having a Ph.D. in engineering, he has worked in almost all continents of the world. Ten Factorial Rocks (TFR) was created to chronicle his journey towards retirement while sharing his views on the absurdities and pitfalls along the way. The name was taken from the mathematical function 10! (ten factorial) which is equal to 10 x 9 x 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 = 3,628,800.