“Achieving your goals isn’t just about hard work and discipline. It’s about physiology.” – Monica Mehta
Not too long ago I stumbled across an article on CNBC with the clickbait headline, 31-year-old millionaire: 'The single most important hack I've used to build wealth'. Now as we’ve explained multiple times in the past on this blog, there is no silver bullet to saving for retirement other than making sure that money in (income) exceeds money out (expenditures). And although that statement remains true to form, the “life hack” referenced in the article has some real merit for increasing the likelihood of reaching one’s retirement goal. So what is the magical hack? It is the practice of breaking our long-term objectives down into short-term goals.
For the individual in the referenced CNBC story, that meant breaking his retirement savings goal down into a daily target. Using a simple online retirement calculator, he figured out how much money he needed to save every day for the next thirty years in order to reach his retirement goal of $1.25M (assuming a 5% annual rate of return on all savings). His magic number was a daily savings goal of $50 at a time when he was “barely able to buy a burrito.” At first it was definitely a struggle and he didn’t always hit his $50 daily savings goal, but he rarely missed a day and always tried to put away something every day into his savings account even if it was only $5. The repetition of this daily exercise created positive momentum and after a while, he was putting away hundreds (or in some cases thousands) of dollars every day.
There is science behind this life hack of turning long-term objectives into short-term goals, based on the various decision centers of the human brain. Over a decade ago, researchers at Princeton University conducted a study to explain why the brain is in a constant battle over short-term rewards versus long-term goals. The conclusion they came to is that decisions involving the possibility of an immediate reward (e.g. eating a chocolate donut today) rely heavily on the emotional part of the brain while those involving more long-term goals (e.g. reaching a healthy body weight) rely on the abstract/logical part of the brain.
To explain the relative inconsistency of these two decision centers of the brain, they gave the following example. Let’s suppose someone offered to give you either $10 today or $11 tomorrow. Which would you choose? According to the study, most people chose the immediate payoff because there is relatively little difference in the two payoffs and the emotional brain is all about maximizing immediate gratification. Now, assume someone makes the same offer but instead of being paid today or tomorrow, the payouts are pushed back to a year from today and a year plus one day from today. In this scenario, most people choose the latter as their logical brain drives the decision since there is no potential for an immediate reward, so the emotional brain is silent on the matter. From an economic theory perspective, which makes the simplifying assumption that all decision makers rely on logic and reason to maximize their economic payoffs, this discrepancy can’t be explained since the length of time between the two payoffs (1 day) is the same, yet the answers are exactly opposite.
I’m sure everyone can relate on some level to this internal struggle between short-term pleasures and long-term benefits and this is precisely why so many people have a difficult time saving for retirement. Even though our long-term, logical brain understands the merits and importance of saving for retirement, it must constantly do battle with our short-term emotional brain which is hell bent on immediate gratification. Which brings us back to the life hack from the CNBC story. If we can take long-term goals and break them down into short-term objectives (a daily savings goal in this case), then we can potentially align the emotional and logical parts of brain. When we set and achieve short-term goals, the brain releases a chemical called dopamine into our bodies. A dopamine release is the first step in creating a habit (whether good or bad) as the brain remembers the sequence of events leading up to the dopamine release so that it can recreate the release in the future.
Dave Ramsey understands this idea better than most. I remember several years ago hearing some advice that he was providing to a caller who was asking about the best way to pay off his debt. Dave’s advice was that they needed to write down all the debts they owed and the amount needed to pay off each debt. Then he advised that they order the debts from smallest to largest and concentrate on paying off the smallest debts first working their way through the stack until they eventually would pay off the largest debt last.
Now, this advice flies straight in the face of basic financial planning which would tell you that you need to pay off debts in the order of highest interest rate to lowest interest rate. But Ramsey wasn’t concerned with minimizing the overall cost of the debt because he knew that by paying off the small debts, his listener would experience a release of dopamine, which would create a positive feedback loop and therefore increase their chances of successfully paying off all their debts over time.
Both Dave Ramsey’s advice as well as the individual in the CNBC article solve for the “human element” of financial planning. We applaud this line of thinking because it attempts to solve for the cost of being human rather than making the simplifying assumption that emotions play no role in our economic decisions. So for those that find themselves struggling to hit their annual savings goals every year, try breaking your savings goals down to a daily target to create some positive momentum. It may be difficult at first, but every time you hit your goal, your brain will reward you with a shot of dopamine which will create positive reinforcement. When we can align the emotional and logical decision centers of the brain, practically anything is possible! This may not be the “silver bullet” to the age old dilemma of saving for retirement, but it certainly is the next best thing.
Author Elliott Orsillo, CFA is a founding member of Season Investments and serves on the investment committee overseeing the management of client assets. He spent nearly ten years as a financial analyst and portfolio manager working primarily with institutional clients prior to co-founding Season Investments. Elliott earned a bachelor's degree in Engineering from Oral Roberts University and a master's degree from Stanford University in Management Science & Engineering with an emphasis in Finance. Elliott and his wife Gigi have three children and like to spend their time outdoors enjoying everything the great state of Colorado has to offer.
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