On this episode of the millennial finance podcast Financially Well, I’ll share tips from the field of behavioral finances. In particular, I’ll discuss how to automate your finances and limit other decisions that may increase your chances for financial success.
Bob Seawright writes a Substack newsletter called “The Better Letter.” On July 30, he wrote an article entitled, “Addition by Subtraction.” He reveals in the subheader that, “Less really is more, but we don’t often see it.” Seawright then briefly explores the history of human decision-making, before applying the research to how we make financial decisions. He describes 10 ways that we can apply the “addition by subtraction principle,” including why you may want to automate your finances. I’ll discuss seven of Seawright’s suggestions momentarily.
First, though, I want to put his ideas and data into context. I regularly discuss money with other Millennials, either as their financial advisor or through a financial wellness program. And in many cases, I can quickly see and hear the financial stress they feel. They often feel guilty for not doing “more” or “enough” with their money. But they also haven’t considered how they may achieve financial success by doing less. If you haven’t yet considered how to automate your finances, you may fall into this same group. And you may have other similar financial hacks available to you.
Here’s the perspective on financial success that I value most in Seawright’s article:
He writes, “When we seek to change objects, ideas, and situations, we routinely add incentives and fail to consider what barriers we might remove. …When seeking improvement, our natural inclination is to add stuff (more tasks, more content, more objects). We routinely overlook solutions that involve subtraction – doing or having less.”
In personal finance, this dynamic is readily visible to us. For example, take all of the new technology, such as apps, that are regularly vying for our attention. Think about the different financial conversations that you may hear at work. Or if you’re online searching for an answer to a specific question, you have a wide array of blog choices. You can go to Reddit, Twitter, or Tick Tock to see what people are saying about a specific financial subject. Then we also have financial trends and what’s happening in financial news, whether it’s GameStop stock or investing on the Robinhood platform. All of these different modern day elements of personal finance encourage us to constantly try new things. They encourage us to constantly do more to try to achieve financial success.
There’s so much noise in this dynamic. As a result, unless we’re very conscientious about how we approach these new elements of personal finance, it’s difficult to achieve some quiet. It’s challenging to gain the ability to focus on the basics. It’s challenging to stay focused on the fundamentals of personal finance. And this may become even more pronounced at certain hectic stages in life. Ultimately, we move away from the habits that we really should make sure we do correctly.
We need to try to be consistent in how we save. We need to try to be consistent with making investment decisions that are aligned with our interests and timelines. If we could do those things well, month after month, we would likely be on track to get where we want to be with our lives and money. But instead, we frequently attempt to incorporate new incentives and new stuff into our lives.
With that in mind, let’s review here seven of the 10 “addition by subtraction” principles that Seawright details in his article. I’ll specifically apply his concepts to Millennials and the personal finance issues that we encounter most often in our lives.
This seems pretty obvious, right? Seawright points to the example of “incentives to eat healthily,” which aren’t as effective as “removing bad eating choices from your living space.” If we apply this concept to personal finance, we want to take as many burdens as possible off our shoulders. So when you automate your finances, you’re directly applying this principle. Due to technology, you no longer have to make the choice to shift money from your savings account. You don’t have to manually invest each month in an IRA. You don’t have to divert money from your checking account to save for a down payment in a specially designated savings account. When you automate your savings, you’re much more likely to complete these tasks. With a system that moves money automatically on a certain day, you’re going to accomplish exactly what you set out to do with that money.
Seawright says, “Since our decision-making is innately flawed and prone to error (on account of both bias and noise), one additional conclusion is that we should make fewer decisions. We should create automated decision engines and implement them whenever and wherever possible.”
A common example that I see among my Millennial clients is those who have target-date funds available in their 401(k) plan. Let’s say you think that you’re particularly prone to error in setting up your investments in your 401(k). You can make one less decision by selecting a target-date fund that ensures you’re well-diversified and rebalancing. The reason doesn’t matter. Your 401(k)plan may not be that strong. Or you just may feel uncertain about the numerous investment options available to you. A target-date fund is a great example from personal finance where you have the option to do less. You can take a decision off your plate.. When you’re less vulnerable to the flaws, confusion, complexity, you’re more likely to achieve financial success in that area.
Seawright defines “slack” as the “absence of binding constraints on behavior.” He says that, when you have sufficient slack, it’s “easier to remove ideas, barriers, and stuff that isn’t helpful.” A simple way of applying this advice to personal finance is to give yourself the space to just think about your finances. Give yourself time to look at your spending. Consider, during some quiet time, what you want for your life and your family in the year ahead. We’re often so busy, distracted, or tied up with work and other commitments that we don’t give ourselves enough slack to think. It’s hard to be thoughtful about what we want our money to do for us in the short and long term under these conditions.
Now, this may be easier said than done. Millennials with young kids or demanding jobs may be trying to just keep their heads above water. For most people, it’s not easy to carve out this time. But this is one example of how “slack,” when added to your life, can help to improve your decision making, including with your finances.
Seawright writes, “We should avoid what Amazon calls ‘walking through a one-way door.’ Amazon tries to avoid making ‘choices that are hard to reverse or extend’ – an idea similar to the medical principle, ‘First, do no harm.’” When I hear this principle, I’m reminded of certain job situations and career trajectories in which many of my Millennial clients find themselves. When work for you is tied to high-paying salaries, it’s very easy to get comfortable with that salary level. And it’s natural to become accustomed to living a certain lifestyle based on that salary.
But people may reach a point where it can be difficult to drop down to a lower income in order to prioritize other aspects of their lives. They may be dissatisfied with a particular job or their industry. They may want more schedule flexibility, including for family time. It can be very difficult to walk back what that salary level is. It’s not easy to drop down to a lower income in order to prioritize some of those other aspects of your life. So I encourage people, especially early in their careers, to avoid “lifestyle creep.” Try to not build a life for yourself where you feel you need a certain salary level or lifestyle. Our interests and personalities change over time. We’re more likely to stay on a path to financial success if we’re able to keep our options — especially with work — open.
Seawright notes that, “Instagram succeeded only when it was stripped of features and reworked to focus on just one thing: photographs.” This brings my mind immediately to investments, where we hear so much competing information. No matter the source, whether it’s CNBC or our colleagues, the information paralyzes many people. Even just reading online, trying to learn about the different investment options available to us, can counterintuitively stop people from acting.
These same people may be aware (as math and historical research both indicate) that investing money as soon as possible can be advantageous. I discussed on a previous Millennial finance podcast episode how early investing provides more opportunities to benefit from compounding growth. As a result, sooner is usually better than later if you want to make your money work for you.
With this goal in mind, we’re also often better off choosing investment simplicity. Despite the noise around us, there’s nothing wrong with a straightforward investment. It’s actually more important to align your investments with your timeline, goals, and tolerance for risk. To me, that usually means low-cost, diversified index funds at Vanguard. To me, investment simplicity means that my allocation reflects the global economy, rather than bets on a “winning” company or industry. Diversified index funds and ETFs minimize the investment choices that you have to make. And these funds minimize the number of different investments that you have in your portfolio. Over time, this can reduce confusion and the mistakes that result from misjudging your portfolio. In personal finance, specifically with investing, simplicity often is what you need to get where you want to be.
Seawright believes that, “what isn’t there can be more important than what is.” Here, he offers up a few specific examples, including too many investment fund choices, which inhibit 401(k) participation at work. He talks about spending less money, which puts more money in your savings account. The value proposition in this approach can differ for each person. I like to point to the opportunity to put your money toward uses that have a higher value to you over the long term. Seawright also provides a corporate example: Costco’s “value proposition involves far fewer choices” than what you may find at their competitors.
Finally, Seawright writes, “Given the sheer amount of stuff competing for our attention, eliminating distractions unlikely to provide substantive benefit will improve the likelihood of our success.” I’ve already discussed some of the personal finance noise that we encounter in our lives. This noise only increases with social media. Every platform can deliver you financial tips from people who may not be qualified to offer them. There’s a lot of value in devoting the time to find a few main resources that you trust and speak to you. Despite the noise we battle, there are great resources out there that reflect your interests and where you are in life right now. The more targeted you can be, the less distracted you’ll probably get chasing shiny objects, such as new trends. Then, you’re better able to focus on the decisions that are most important to you and your financial stability.
To conclude, I want to credit Bob Seawright. His article highlights so many useful behavioral finance strategies for people of all ages, including Millennials. But you also could easily become overwhelmed. So I encourage you to start with one strategy. Perhaps you automate your finances first. Maybe you recognize that you can improve your financial wellness simply through less time on Instagram, Tik Tok, or Reddit. Start with just one of these tips. Make sure you can get it to work for your life and reap some initial benefits. Then, you can keep coming back to an article like this over time. You can check in to see what else you might change about your approach to personal finances. With some consistency, you’ll move closer to your idea of financial success, especially as your life evolves in the years ahead.
Check out Bob’s article at The Better Letter. Again, it’s called “Addition by Subtraction.” I encourage you to support him on Substack and social media, and feel free to reach out to me with any questions that his thoughts raise for you.
[Editor’s note: this article reflects the transcript (which I’ve edited for clarity) of a recent Financially Well podcast episode.]
Kevin Mahoney, CFP® is the founder & CEO of Illumint, a Washington, D.C.-based company that offers financial planning for Millennials. He specializes in navigating the new financial decisions that arise during our late 20s and 30s, such as repaying student loans, buying a house, & investing savings. Kevin also works as a financial wellness program provider to millennial employees around the country, including group speaking engagements.
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