Dan Ariely, behavioral economist and psychologist.
Photo: Mary R.
Being a money savvy can come with a steep learning curve, even for financial experts. And for recent college graduates, learning how to spend and save can be an even bigger challenge.
Dan Ariely, professor of psychology and behavioral economics at Duke University, knows this firsthand. Despite teaching at a top business school, he still has trouble resisting the impulse to buy gadgets, he says—a lesson he learned the “expensive” way.
Ariely has a habit of falling victim to social media ads that show him the latest tech gadgets with exciting new features. He’d click the buy button before considering how much he really wanted, he says.
These days, Ariely gives himself a 48-hour “cooling off period” before making online purchases, a strategy that helps him think clearly despite his natural excitement to buy something new and shiny.
Learning to be more thoughtful about purchases is just one financial habit that Ariely says is important. There are many students he has adopted that he hopes to instill in his students at Duke Fuqua Business School.
“Life isn’t about spending less, it’s about spending better,” he says.
Here are Ariely’s top four tips for his students to help them become more financially savvy after graduation.
It can be tempting to stretch your budget once you’re getting a steady — and higher — paycheck each week. But Ariely says recent graduates would be wise to avoid any spending on new or “fashionable” things.
He encourages his students to remember the “hedonistic treadmill,” a theory that suggests people always return to a baseline level of happiness, regardless of life events or purchases.
“When you get something new, it’s very exciting, but then you get used to it. If you get a new TV, couch, dining table, car and bike all in the same week, in one month, you’ll forget all of them. And the fun effect will diminish.” on your quality of life.”
This doesn’t mean you shouldn’t treat yourself when you start making steady money after graduation. The key, he says, is to “space out” the bigger purchases and think about what you’re buying.
For recent graduates, Ariely says, there may be a temptation to make a lot of purchases. Try to resist. “Be very concerned about getting into debt,” he says. “An early age is an expensive time to get into debt and a really good time to start saving.”
He adds that avoid borrowing money whenever you can, as this is one of the three main habits you should try to maintain as you enter the professional world of work. The other two are living below your means and establishing the habit of saving and investing for the future.
“Maximizing the conclusion of your 401(k) is important. It’s tempting not to do it, to say, ‘Okay, I’m just getting started, I’ve got things to do.'” But it’s important to get things going, he says, “because compound interest works really well when you’re young. You just have to use it.”
Financial planning in general involves looking ahead. But it will also be useful to look at past purchases, and think about how much they brought you joy.
in one of the Research studiesAriely asked consumers to look at their previous credit card transactions and identify their purchase regrets. The Millennium Spending Study asked more than 1,000 consumers between the ages of 20 and 36 to identify purchases they considered regretful or satisfying. Ariely and his team found that millennials gain more satisfaction from long-term purchases than impulse purchases (70% and 50%, respectively).
Similarly, the adults surveyed were 10% more satisfied With repeat purchases more than one-time expenses.
“It turns out there were a few things people regretted,” he says.
He advises his students to think about their past purchases and identify areas where they were unintentionally overspending. Weekend purchases were a major source of regret in the study. Going out, for example, is often expensive, as transportation and food bills pile up.
When it comes to saving money, Ariely jokes that the standard approach is to be “miserable.” Like eating healthy and exercising, he says, you can choose to feel defeated in the face of a daunting task. Or you can find pleasure in doing what feels good to you.
Some think you just have to “get through it and you have to do it. It’s not very easy. It’s hard to do something long-term that’s going to be hard,” says Ariely. But it pays to “find happiness” in necessary financial habits like building your savings.
As you begin to save and succeed in building financial comfort for yourself, take a moment to recognize your accomplishments and treat yourself. While Ariely doesn’t recommend buying every gadget or accessory that comes across your social media feed, it’s important to buy yourself an occasional treat — whether it’s a night out or a new piece of clothing —.
He reminds his students and all recent graduates to think about their short- and long-term financial well-being when answering one crucial question: “How do we make ourselves feel good?”
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