Afford Anything - How to Stop Screwing Up Our Finances, Even in a World That Leads Us Astray -- with Dr. Dan Ariely

Episode Date: May 18, 2020

#257: “The checking account is like the trash can of personal finance.” Today’s podcast guest, the famed behavioral economist Dr. Dan Ariely, is not a fan of checking accounts. Or supermarket end caps. Or anything that distracts us from our financial goals. In this episode, he explains why. Dan Ariely is one of the world’s most renowned behavioral economists. He’s the James B. Duke Professor of psychology and behavioral economics at Duke University. His TED Talks have been viewed more than 15 million times. In 2018, he was named one of the 50 most influential living psychologists in the world. He’s the New York Times bestselling author of many books, including Predictably Irrational, a book that challenges our assumptions about our ability to make rational decisions. He also wrote Dollars and Sense, a book about our cognitive biases, and The Honest Truth About Dishonesty, a book about how we lie to everyone, including ourselves. For more information, visit the show notes at https://affordanything.com/episode257 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, your energy, your focus, your attention, anything in your life that's a limited or scarce resource. Saying yes to one thing implicitly means saying no to something else. And that leads to two questions. First, what is truly a value in your own life? And second, how do you align your decision-making to reflect that? answering these two questions is a lifetime practice.

These are not simple questions to be able to incorporate into our lives. It's hard to act out the answers. And that is what this podcast is here to help facilitate. My name is Paula Pan. I am the host of the Afford Anything podcast. And today, Dr. Dan Ariely joins us to talk about why we screw up the way that we handle money so much and what we can do about it. Dan Ariely is arguably one of the most famous and well-respected. behavioral economists in the world. His TED Talks have been viewed more than 15 million times,

and in 2018, he was named one of the 50 most influential living psychologists in the world. He kicked off his career by getting two PhDs, one in cognitive psychology from UNC Chapel Hill and the other in marketing from Duke University. He spent a decade as a professor at MIT. And now, he is the James B. Duke Professor of Psychology and Behavioral Economics at Duke University, and The New York Times bestselling author of many books, including predictably irrational, which is a book that challenges our assumptions about our ability to make decisions based on rational thought, as well as dollars and cents, a book about our cognitive biases in the way that we handle money, and The Honest Truth About Dishonesty, a book about how we frequently deceive everyone, including ourselves.

Dan is also the chief behavioral economist at Capital, which is an app that uses lessons from behavioral economics to help people build better money habits. Dan, in his own words, said that he became engrossed with the idea that we repeatedly and predictably make the wrong decisions in many aspects of our lives, and research could help change some of these patterns. He joins us on today's show to talk about how we can make better decisions with our money, particularly during this incredibly challenging time. Before we get to this conversation with Dan, I'd like to make a super exciting announcement. Today, Monday, May 18th, 2020, we have opened the doors for enrollment in our course, your first rental property. If you are interested in learning how to invest in buy and hold rental properties,

and if you want a complete A to Z guide that walks you through everything you need to know, how to analyze a property, how to search for great properties, whether you're local or out of state, how to finance properties, how to build a business, create systems, grow a team, screen and manage and retain tenants. If you are interested in learning all of that, complete with quizzes and worksheets and checklists and flowcharts and small accountability groups and TAs and forums and live Q&A office hours, if you are interested in all of that, this is your chance to enroll. Enrollment will be open for one week only. So it opens today, Monday, May 18th, and we close our doors. one week from now, Monday, May 25th. After that, we turn our full attention to the students.

It's a 10-week-long online course. You are welcome to self-paced through it, if you prefer, but you're also encouraged to go through the 10-week course along with a group, along with your cohort, so that you can have a community of people for support and accountability. For all of the details about this, go to afford-anything.com slash enroll. Any questions that you have will probably be answered there. Again, that's afford anything.com slash enroll for more details for FAQs and to enroll this week only. So with that said, I hope to see you in class, but for now, let's turn our attention to this interview with Dr. Dan Ariely, where he talks about how we can make better financial decisions.

Hi, Dan. Hello, hello. How are you doing? Wow. Now, are you looking for a real answer or are you just looking for an okay? Yes, yes. I am looking for a real answer. Okay. So about seven weeks ago, I was in North Carolina. I teach at Duke University. And I started getting more and more calls from people in the government in Israel about the corona crisis.

At some point, I figured I can't get all of these calls at these strange hours and I couldn't really help from a distance. So I came to Israel. And I've been basically been on the chair that I'm talking to. year from now for almost seven weeks without moving, I started trying to help the government figure out how to give instructions to people. What does it mean to tell people, don't leave your homes? Or what does it mean, leave only your homes, but only to buy groceries? What would people do? Who would listen? Who would not? Then it turns out, as you would expect, that the education system was completely unprepared for distance education. So we started looking at that. Then it turns out that domestic violence has gone up. Some against women, a lot against kids,

very, very painful. Then there were questions about how the government is going to compensate people. What are efficient models of doing it? Then they were afraid of corona in prisons. Should you release some people early because of that? So my time has been non-stop corona. by the way, tracking people, questions about privacy. And every ugly aspect in human society has become more intense with that. And, you know, as a social scientist, I try to deal with all kinds of things that kind of look at where we are irrational, how could we improve our behaviors. And I usually kind of have the regular ups and downs.

You know, I feel like we're making progress. Then I feel that we're not. Bureaucracy, stupidity. There's kind of a cycle. of hopefulness and despair in the life of a social scientist. And now I'm experiencing the same cycles, but they happen four times a day. So it's really incredible.

Do you feel like you see the same patterns but amplified? Or have you seen new patterns emerge because of the new circumstances? So I think a lot of the patterns are the same, right? Domestic violence is not news. Dysparity in education is not news. people's lack of cushion. If you think about it, a lot of our society has been driven toward efficiency at the cost of resilience. So imagine the following.

Imagine you have an airline. What's a good airline? A good airline is one that the plane lands. People leave as fast as possible. The plane is refueled, cleaned. New people are going on and the plane takes off. Or what's a good hospital? where you have 100% occupancy of your beds.

You don't have extra. Or what's a good factory? The raw material comes in just in time. It's being processed. New products are being created and shipped just in time. And we've created lots of efficient things, but without resilience. So imagine a hospital that you had a manager of a hospital that says, let's keep 10% of our bed just in case.

Nobody would let them run a hospital. Or imagine you're a small business owner and you said, I want three months of salary in the bank just in case. It would look crazy. It's wasteful. Or if you're an individual and you say, I want to keep some money in cash just in case. Again, crazy. If you think you have money, put it in the stock market to work for you. Why would you do that?

And it's very natural for us to not want to have things go to waste and to make everything effective. efficient. I'm actually sitting in my mother's kitchen. Think about how kitchens are built, are built to minimize our movements. The distance from the refrigerator to the sink, to the stove, needs to be the minimum amount to make the smallest amount of steps needed. And then, of course, we get surprised we're gaining weight. But we're doing so many things for efficiency, and then we lose this really important thing called resilience. And I think, think the corona crisis is teaching us how important resilience is. Like, think about the people who are losing their income.

And that's something we find. You know, in the U.S., we have a very large percentage of people, more than 40% of the people, say that if they have an unexpected income shock, like some kind of an expense for $500 or more, they will not be able to pay it without borrowing the money on a credit card or something like that. Just think about what it means. That's the opposite of resilience. Now, in some sense, let's say somebody has a $15,000 credit card debt and they have some money, you would say, pay your credit card debt. That's the most efficient thing to do. But now they have no money to cover new unexpected results. So what you see in the corona crisis is lots of failures of systems because

there's no resilience. most people, at least most people who are listening to this, can accept that they need an emergency fund of some amount of money. But how do they know when they are crossing that threshold of enough versus too much? So I would say that there are two kind of answers for this. One is psychologically and one is financial. The psychological answer, everybody needs to answer for themselves, right? What do I feel comfortable? Is it one month of salary? Is it two? Is it three? Is it six? And the psychological one is important. Actually, there's some research in the asset building literature that says that if you have a credit card debt, you should also build some savings accounts.

And you can say, why? My credit card debt, I pay 20% interest on. If I have savings, I get basically zero on. Why should I have some savings? And it turns out it gives people a different outlook on life. So if you owe $10,000 in your credit card, don't have. have $10,000 in a savings account, but if you have $500, in a savings account, you would feel better about yourself, right? And that feeling better about yourself would help you create

resilience and energy and the drive to save on other things and put some money towards saving. So the first one is psychological. You need to figure out what gets you not to be stressed out and having the right amount of emergency saving where you would not feel stressed out, it's the first thing. And then there's a question of, not psychological, but a real amount. So in my case, I work for university. I have a long-term contract with them. The odds that they will terminate me with a two-week notice is incredibly low. But depending on your particular job, you might be at more risk or less risk at that. So for that, everybody needs to to assess their own situation and say, forget what I'm psychologically comfortable with.

What about losing my job? What are the odds that it will happen? And if you think the odds are higher, you should create more cushion. Because, you know, once you lose your job, it usually takes people much longer to get a new one than they think. And then there's another, you live with somebody. And if you live with somebody and you're a two-income family, that makes the picture a little more complex and more interesting and better in some ways and worse in others. But now you have to take two incomes into account.

As people think about how they're going to manage their money, especially during this coronavirus crisis, how do we avoid lying to ourselves? because clearly people are going to be rationalizing bad decision making, selling out of investments, not having enough of an emergency fund. What are the effective methods of encouraging people to look at things in a logical way without allowing themselves to rationalize their impulsive decisions? So I'll give you kind of a couple of things. So the first one is that we are really good at giving other people advice. when we think about ourselves, we're full of emotions, some good, some bad, but when we think about other people, we're much more called and calculated about them. For example, in one study, we described a particular medical scenario to people. You just went to your doctor, your doctor gave you a diagnosis.

Do you now go ahead and ask your doctor to say, hey, can I please get a second opinion? What percentage of people do you think go ahead and ask the doctor for a second opinion? I would imagine probably not a high amount. You're absolutely right. Very, very low. Yeah. And the reason is that it's embarrassing, right? You go to your doctor, they're taking care of you, and all of a sudden you say, I don't trust you.

Give me a second opinion. Now, imagine people are advising other people. And, you know, I ask you, Paul, I, look, I just went to a doctor. they told me I need to get this surgery. What do you think? Should I go for a second opinion? You are now not worried at all about me offending my physician. You're just thinking about what's the right medical thing to do.

You're not experiencing my emotions about telling the doctor, I don't trust you, give me the name for a doctor. So almost everybody recommends, go ahead and get a second opinion. So the first thing is to imagine somebody in our shoes. That's kind of the trick. The trick is imagine somebody that is similar to yours, but not you, and now give them some advice. And then turn around and take your own advice. Because that basically gets us to experience something more objective. Another trick is to basically imagine that you started from a different position than what you are now.

So remember, we are very sensitive to what is called anchor, to the beginning of how something is set up. If we have 2% of our salary deposited into savings, we have that as an anchor. And when we start thinking about what we need, we will start thinking about 2%. Do I want to go up? Maybe I'll go by 1% up. But this basically kind of thinking gets us to be too much connected to our past decisions. What we need to do is we need to clean up the slate and start from scratch. Now, we can't really start from scratch.

We're not there. But we can imagine we have started from scratch. Right? So I can say, Paula, imagine that you got to a new job. You're not in your current job. And I said, do you want to increase your savings? You got to a new job. And they offer you this package of retirement.

How much would you put it? So you basically are trying to eliminate your current particular attachment to your current situation. You imagine a new situation and then you say, what would they do in this new situation? And then again, you go ahead and you do what you're doing now. And then the other thing to do, and this is especially true for our decisions in the stock market, is to basically create some rules. You know, in many things, our emotions is what trips us. If you think about how emotions are created, emotions are these triggers. that get us to take an action.

You're there, you know, 20,000 years ago, at the end of the jungle, and you see a tiger, or something that looks like a tiger. And your emotions don't say, open your Excel spreadsheet and start thinking about what's right and wrong. Your emotion says, run.

And it's not about the cost-benefit analysis, and it's not looking. It just says, run now. And that's what emotions are, right? there are basically instructions for taking actions. Now, emotions have lots of good things, but they are not good for long-term financial management. That's just not what they do.

So I would basically try to not get emotions about the stock market. And the best way to do that is not to look at what's happening in the stock market. So if you start your day, Every day and you look at how many people today died or got sick from COVID-19, that's not a good way to start the day. There's no way that this will improve your ability to make decisions. In the same way, if you start your ideas about investing by looking at your portfolio, that's not a good strategy.

So you could make decisions, right? And you could say, I think Amazon is going to go up. Or you could say, I think gold is going to go down. And whatever you think, that's fine. You can read and so on. But going and looking at how your portfolio is doing is in no way a good recipe to make better decisions. If anything, I mean, these days it would probably be just negative.

It would kind of color your glasses in a depressing way and then you'll make worse decisions. When was the last time you looked at your portfolio? My overall portfolio, as an aggregate, I track twice a year, but individual accounts I look at fairly frequently. Wow. Okay, so I hope you don't mind. But I don't think it's a good idea unless you make lots of changes. Now, if you are a person that makes lots of changes and you plan these changes and you're not doing it as a reaction to what your portfolio is doing, then you're perfectly fine. But I think for most people, there are things we just need to do on put and forget. There are people who, as the stock market went down, took money out, right?

And then the stock market rebounded some, actually a lot. And now people are out. And some people are saying, you know, should I go back or not? And it's very, very hard to time the market without insider information. Of course, it's illegal to do it with. But this is why for maybe Boaz Weinstein or like a few wizard kids who understand the market in a different way, that's one thing.

But for most of us, we just need to say, we're just putting the money in, we're not trying to beat the market, we're not trying to beat other people, we're just doing what we can, which is to save something. We'll come back to this episode after this word from our sponsors.

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You know, one of my favorite companies and a company I try to help is called Capital. One of the things that Capital does is to help people set rules. So, for example, your paycheck comes in. Let's put a percentage towards savings, right? Let's not live it in your check-in-count. You know, the checking account is like the trash can of personal finance, right? Everything goes in there and everything comes out of it. That's not how it should be.

when your salary goes into your checking account, some of it has been spoken for. There's some money that should go to rent and some money should go to beer and some money should go to your health insurance three months from now and for all kinds of things. But if we don't actually put the money into these different buckets, we will not be able to keep it in our mind and we'll make decisions.

And the point is that we all have goals in life, right? If you and I would sit now now and I would ask you what are your goals that are connected to finance, I'm not talking about meditating a few more minutes a day, you would tell me something about your goals, right? You would say I want to get a new car in three years from now, and I want to increase my saving, and I want to buy a new bicycle, and I want to, you'll have all kinds of goals. And the thing about life is that other people are trying to mess up your goal. Right? And think about something very simple.

Like you go to the supermarket and you have a goal. You know what you want to buy and you want how much you want to spend. But the supermarket also has a goal. And the supermarket goal is not the same as yours. And guess what? They control the environment. The supermarket decides where to put what? What do they put by the end of the aisle or close to the cashier?

Do they put the cucumbers and tomatoes? Of course not. They put the things you're most likely to impulse buy. That's right. They basically have two ways of convincing you to buy one. One is the cognitive approach. This is good for you, healthy for you long term. And they have the emotional squeeze. Smell like chocolate, I want some, right? Or trashy magazine or whatever it is. And of course, it's easier to go via the emotional route than the cognitive one. So that's what they do. But the thing to realize is that we have goals. And almost everybody around us, have different goals and they are competing with our goals,

and they try to get us to derail us from these goals. So what happened is that if you use an approach like capital, where your money comes in and it goes to different goals, now you understand better your trade-offs. So imagine we have very few products in life. And imagine your salary comes in, and some of it goes toward your rent, And some of it goes toward your summer vacation and some of it towards groceries.

And some of it is towards clothing and some of it toward beer. That's all the categories there are, right, to make things simple. And now you walk by and there's an ad for coffee and a donut or coffee and a croissant. This is not part of your goals. But now I say, okay, which gold do you want to take money for to do this? Where's the money coming from? And usually you don't think about it is what you say. do I have money in checking account?

But asking, do you have money in checking account is not the right approach because your money in checking account has been spoken for by other goals. The question is, when you see the coffee in cross-so, is this a higher goal than the other ones? And by the way, if the answer is yes, if you say, you know what, I had a goal for summer vacation, but I'm willing to have slightly less summer vacation because I really want coffee in a crossover.

That's fine. Nobody's telling you can't do it. But if your goal is to, have a summer vacation, let's help you try to live to that. So that's why goals are so important. Basically, all of our financial decisions is about from the money I have to spend now, what do I want to spend it on? And how do I want to spend my money between now and later?

That's it. What we call saving is not really saving, is delayed spending. Nobody wants to die with a lot of money. I mean, if you want to give your kids money, it's fine. But it's not about saving. It's really about spending later. But somebody needs to help us to figure out those goals and how to trade them off. And it's tough.

And modern technology is making it tougher, right? So credit cards are making it tougher to understand what are we giving up. And student loans make it tougher. So imagine that I gave you $50 every day. We live in a cash society and everything you pay on a daily basis. You pay on a daily basis for rent and you pay on a daily basis for food. Everything is daily basis. I give you $50 every morning.

You would understand opportunity cost, right? You would understand that if you buy a big breakfast, you don't have money for a drink at night or medication or whatever. What if I give you the money for a whole week? Well, on Monday, you would think you have no opportunity cost. By Wednesday, you'll realize you're running low. What if I gave you the money for a whole month? What if I also gave you a credit card and student loans and car payment and a mortgage

and savings accounts and retirement savings? And now I say, what is the consequence of buying another bottle of wine? Where is it coming from? And without a system with goals, we don't have a way to envision it. Right. The trade-offs become invisible. Exactly. And they're becoming invisible, hard to make, and what do we do as a consequence?

We don't think about it. You say, how do we, you ask the question of how do we not fool ourselves. The reality is that when something becomes very difficult to compute and figure out, we just don't do it. So there needs to be a more clear line between action and consequence, a more visible line, a more obvious one. Exactly. So money is really all about opportunity costs, right?

Every time you spend a dollar on something, you have a dollar less to spend on something else. That's the beauty of money. that's the essence of money, and that's wonderful. But without something to help you imagine it, you don't see it. Thinking about the opportunity cost of money is inherent in the usefulness of money, but it's hard to do generally. Modern technology is making it harder to do, and we need help. This is, by the way, kind of a really interesting junction in terms of fintech.

So, you know, when we had physical money and, you know, you had a wallet, there's a limit to how I can help you think about your money in a better way. It's physical and it's in your wallet. But when we have, we move to digital, we have kind of a intersection. I can give you an electronic wallet that gets you not to think about opportunity costs. Right? I can give you an electronic wallet that makes money feel like you're just swiping or you're just signing or you're just signing or you're. you're just touching something and you don't feel that the money is going from your pocket. Or I can do something that make you realize that if you spend more money here, you'll have less

money for there. And it's kind of our choices. And right now, a lot of the payment technology is aiming at the spending more. So we have Apple Pay, Google Pay. You know, everybody's storing our credit cards. So the cost and their awareness is even lower. But you know this thing that Amazon has where it's like a shop that you go in and you just pick things and you never know that you're paying? Oh, right.

Yes, the physical brick and mortar shops where you walk out and you don't even have to deal with it. Yes. Yeah. So all of those things are making opportunity costs less salient. And they're very good for increasing spending. But we need to fight back because if we don't have tools to help us fight the thoughtless spending, we're the one who are eventually paying for this. So the tools, I think, are not the right tools,

and the temptation is too much, and companies are trying to stress our heartstrings rather than our cognitive, and they're successful in getting us to overspend. And we need tools to be on our side. Otherwise, it's just not a fair fight. We started this conversation talking about emergency funds. when it comes to big lump sum amounts such as an emergency fund or your retirement portfolio,

it's hard in those instances to assign a job to every dollar. And yet it's tempting when we're faced with tradeoffs in our immediate spending to say, well, I can just shrink the size of my emergency fund or, well, I can just shrink the size of my retirement contributions. How do we fight the temptation to pull from those accounts? or to rationalize pulling from those accounts? The idea that we can fight our temptation, that's just not going to work. It's just not a strategy. The way to do it is to create rules.

Think about how religion works. Religion doesn't say, try to act this way. Religion says do and don't do. Or alcoholic anonymous, right? They say no drinking whatsoever. Why isn't the rule like half a drink is okay? because if they had a rule that says half a drink is okay, we would develop very big glasses. And we would say, oh, you know, I'll not drink in two weeks, I'll have it now.

We would basically trick ourselves into all kinds of things. We need clear rules that help us protect against ourselves, right? So things like I always max my retirement savings. And, you know, whatever rule you decide, but you pick a rule and you make it clear that it's a rule. For me, for example, I have a sweet tooth. And I basically decided a few years ago that I have only one dessert a week, only on the weekend, either Saturday or Sunday. By the way, over time, I also reduced my appetite for sweet things. So it had a benefit as well, right?

We can get used to lots of things. But the rule was very important, and the rule was simple, never on the weekdays. And that's a rule that is generally easy to follow. And that's what we need to do. We need to create rules that are relatively easy to follow and that we could figure out and know at each point where we are. For the people who are listening to this right now who are thinking, this sounds like a great idea, I would like to create a set of rules for myself.

How can a person get started in building out this set of rules, money rules? So again, you know, I like capital because I think that rules are particularly helpful where they also get counted automatically. So if you have a rule that gives you a lot of work, it's not a good rule. So, for example, counting calories turns out to be a really good rule for very, very few people. If you're a person who can count calorie, that's amazing. But most of us can't count calories. So, you know, we just, like, life is not worth living if you have to count calories.

So I think this is what technology is incredibly important, because if you have to count calories. because if you have to continuously examine everything you buy and make a note and put things in Excel, it just sucks the joy out of life. So what you want is you want a rule that basically is being tracked automatically for you and help you figure out where you are. So that's the first thing. The other thing to do, to figure out which categories we're overspending on. So imagine that we looked at your spending for the last, let's take Corona time out,

but let's say we looked at your January spending. Let's figure out how much happiness did they give you, as much as you expected, more than you expected, just as you expected. When we do these kind of experiments with people, we find lots of things that people said, oh, you know, I didn't get as much happiness from this than I expected. And that's a good indication. that's a category you might want to spend less money on. By the way, can you guess what is the number one category that people told us

that they were surprisingly unhappy with? I would guess late night online shopping. Interesting. The number one was going out to dinner. And it's not because going out to dinner is not a good thing, but it's because when people go out to dinner, they often end up spending too much money, eating too much, drinking too much, and regretting it the next day.

So going out with friends, it's wonderful. But if you go out, eat too much, drink too much, and then it's a recipe for disaster. So you need to examine your past purchases, realize what kind of things you regret, and then what you could do is set up a new set of rules. For example, say, I'm going to limit myself to one restaurant a month or two, whatever, whatever we decide, but then you have to, you decide about this. Right. Well, thank you so much for spending this time with us, Dan.

Where can people find you if they would like to know more about you and your work? So right now I'm in hiding. No. So my website is www. Danarelli.com. Dana really is d-a-n-a-R-I-E-L-Y.com. And there are talks and more material and references to some books and academic papers. I personally have used capital for a long time, and I find it.

a very good tool for my own spending, and I would encourage everybody to try it, to try something that is supposed to be on your side as a money user to help you spend in a way that is more aligned with your own preferences and ideas. Thank you, Dan, for sharing that insight and advice. What are some of the key takeaways that we got from this conversation with Dan Ariely?

I'll be back to talk about those right after this work. from our sponsors. Now, Dan mentioned the app capital a handful of times during this conversation. If you enjoy getting free money, they're running this crazy incentive for people to join right now. If you use our referral link to open an account, and if you keep the account open for at least 45 days, and if you deposit at least $20 into your account, they will give you $25. So they'll deposit $25 in your account if you use our link to open an account with them.

So it's $25 for about five minutes of work. So to get that $25 bucks, use our link at afford anything.com slash Dan. D-A-N. That's afford anything.com slash Dan. Speaking of Dan, what are some of the key takeaways that we got from this conversation? Here are nine. Number one, Dan talked about how many people pursue efficiency at the cost of resilience. By trying to over-optimized, by trying to be too.

too efficient, we don't build ourselves the margin of error, the cushioning that we need to be able to absorb shocks and setbacks. We've created lots of efficient things, but without resilience. So imagine a hospital that you had a manager of a hospital that says, let's keep 10% of our bed just in case, right? Nobody would let them run the hospital. Or imagine you're a small business owner and you said, I want three months of salary in the bank just in case. It would look crazy. It's wasteful. Or if you're an individual, and you say, I want to keep some money in cash just in case.

Again, crazy. If you think you have money, put it in the stock market to work for you. It's natural for us to want to make the best, most optimal use of things and to maximize our money. So for example, when times are good when the economy is booming and we're in a bull market, people often say, oh, do I really need to have an emergency fund? I hate the idea that my cash is just sitting there, not making any money, it's losing purchasing power to inflation every year. If I just put it in the market, it could be going up. When we're in a bull market, it's easy, it's tempting to think of the stock market as a high yield savings account, which it's not.

And it's tempting to not have an emergency fund because we are so. hyper aware of the opportunity cost associated with keeping one. But as Dan points out, while efficiency is great, too much efficiency comes at the cost of resilience. So not having an emergency fund, that is the opposite of resilience. Relying on credit cards to get you through a crisis, that is not resilience. And that's how systems fail. They fail because they don't have that resilience built in. And so while it's great to try to become more efficient, while it's great to try to optimize, make sure that you are not playing offense at the expense of having a good defense. And so that is the first key takeaway. Do not pursue efficiency at the cost of resilience.

Key takeaway number two, prioritizing your savings, even over and above debt payoff, can improve your outlook. There's an endless debate in the personal finance community about whether consumer debt, such as credit card debt, should be considered an emergency or not. should you pay off your credit card debt at all costs right now? Or should you build an emergency fund while you are paying off your debt? Should you send all your resources towards debt repayment? Or would that be putting all of your eggs in one basket? The research, according to Dan, says that you should make saving money a priority,

even if you are currently battling credit card debt. When it turns out, it gives people a different outlook on life. So if you owe $10,000 in your credit card, don't have $10,000 in a savings account, but if you have $500, in a savings account, you would feel better about yourself, right? And that feeling better about yourself would help you create resilience and energy and the drive to save on other things and put some money towards savings. What's interesting to me about this conversation about an emergency fund while you're in the process of paying off high-interest debt is that even days,

Dave Ramsey, who has built his reputation on being staunchly and aggressively anti-deat, even Dave Ramsey says to build a $1,000 emergency fund before you start attacking your credit card balances. And his reasoning for it is that mentally, behaviorally, it teaches you to rely on your savings accounts and not your credit cards to bail you out of an emergency. Now, if you are currently battling credit card debt, how big of an emergency fund should you keep? Different experts are going to have different answers to this, but the answer that is right for you will depend on two things. Number one, your level of comfort or your level of risk

tolerance. How much money would you like to have in a savings account in order to feel better about yourself to create that resilience and energy and drive that Dan Ariely talks about, the drive to save on other things? That's one factor. And then the other factor that it's going to depend on is your actual risk based on your work situation, i.e. the likelihood that you might lose your job or get furloughed, and your resources available. What other resources do you have that could bail you out in the event of an emergency? So that is the second key takeaway. Even if you are battling high-interest consumer debt, you should still prioritize keeping money in a savings account. Key takeaway number three. In order to make better decision,

take your own advice. Dan points out that it's hard for us to make rational, logical decisions about our own circumstances because we, by definition, are emotionally wrapped up in our own lives. But when we have the benefit of distance from somebody else's situation, we can often see their situation in a much more logical, rational manner. And the advice that we give to them is often the advice that we ourselves need to take. We are really good at giving other people advice. When we think about ourselves, we're full of emotions, some good, some bad. But when we think about other people, we're much more called and calculated about them.

It can be hard to take our own advice, because our minds aren't clear when we're thinking through the emotional decisions that relate to our own lives. It's much easier to give advice when we're free of. of those emotional attachments to outcomes. And so to gain clarity, temporarily detach yourself from the situation and look at it objectively. And to be able to do that, put yourself in someone else's shoes and put somebody else in your shoes. What advice would you give them if they found themselves in the situation that you're currently struggling with? In other words, be a friend to yourself and then take that advice.

That is key takeaway number three. Key takeaway number four. get rid of your anchors and start from scratch. This is another technique that Dan advises in order to improve decision making. We are often anchored to our past decisions. And as a result, we evaluate future decisions relatively based on decisions that we've made in the past. And I'll let Dan give an example. Imagine that you started from a different position than what you are now.

So remember, we are very sensitive to what is called anchor, to the beginning of how something is set up. If we have 2% of our salary deposited into savings, we have that as an anchor. And when we start thinking about what we need, we will start thinking about 2%. Do I want to go up? Maybe I'll go by 1% up.

In this example, that 2% savings rate is the initial anchor. And so when we're thinking about increasing our savings rate, we anchor to where it currently is, and evaluate future options based on that. But if we eliminate our attachment to our current situation, if we erase the past and imagine a current situation in which nothing came before, which means nothing from the past can influence us,

then we might be able to make very different decisions. So using Dan's example, rather than thinking, well, currently I'm saving 2% of my salary, maybe I should increase it up to 3%. Instead of doing that, If we start with the question, what's my ideal savings rate? Forget what I'm saving right now. How much ideally, in a perfect world, do I want to be saving?

Then we might pick a number that's significantly higher than 2 or 3%. Then we might pick a number that's 10 or 15 or 20 or 30 or 40 or 50%. And now we have that as the goal. And to be clear, getting there might involve incremental steps. getting there might necessitate 1% increases so that we can make those lifestyle adjustments. But those incremental steps are the how. They are not the what. And by getting rid of anchoring to our past decisions from imagining a future from a blank slate started from scratch,

we are able to imagine radically different whats, radically different goals or visions. And so that is key takeaway number four. use this imaginative exercise to let go of your attachments to pass decisions. Key takeaway number five. Emotions are terrible for long-term financial management. Emotions have lots of good things, but they are not good for long-term financial management. That's just not what they do. So I would basically try to not get emotions about the stock market.

And the best way to do that is not to look at what's happening in the stock market. Dan recommends ignoring your portfolio. Looking at it on a constant basis will only trigger your emotions. And once those are triggered, it's natural to react to those emotions. So, quit looking at your portfolio, quit obsessively looking at the stock market. Don't start checking the financial news of the day. Ignore the noise. Stay the course.

Emotions are part of our survival instincts. They help us assess a situation in the blink of a moment. and take immediate action, but they don't serve us well when immediate action is not needed. And a long-term strategy does not require daily immediate action. A long-term strategy requires staying the course. And our emotional reactivity to the noise, the volatility, the temporary ups and downs, those are the things that distract us from the rules that we've laid out for ourselves. So that is key takeaway number five. Key takeaway number six. reframe the financial trade-offs.

Instead of asking yourself if you have enough money in the bank to be able to afford something, ask yourself, where is this money coming from? What other thing am I willing to spend less on so that I can make this purchase? Dan gave the example of maybe you want to take a vacation, but you also want to go to a cafe and have a coffee and a croissant. There are many people who will buy the Daily Latte, the croissant, and then complain that they don't have enough money to travel. When in reality, they do have enough money to travel, they just don't have enough money to travel

and maintain their expensive restaurant habits. That's the notion of you can afford anything but not everything. That's the notion of those tradeoffs. And so being cognizant of those tradeoffs is a way that we can direct our money towards where we really want it to go. The checking comes is like the trash can of personal, finance, right? Everything goes in there and everything comes out of it. That's not how it should be. When your salary goes into your checking account, some of it has been spoken for.

So this concept is similar to giving every dollar a purpose. If you're having trouble saving because your goals are nebulous, make them real, make them tangible, make them specific, give them particular dollar amounts. Don't say, I can't afford to travel. Make a clear idea of what type of travel you want to do, how much it's going to cost, and how much money you'll need to save along the way. So, for example, let's say that two years from now, you'd like to spend a month in Argentina. Well, go online, read blogs from people who have traveled around Argentina,

get a sense of how much that trip is going to cost, and then if you want to take that trip in two years, which is 24 months, it's a simple division problem. Cost of the trip divided by 24 months is the amount that you need to save monthly. And once you have that figure, then that coffee and croissant or that expensive pair of shoes or set of golf clubs, well, now you know what the tradeoff is. So that's key takeaway number six. Be hyper aware of those tradeoffs. Key takeaway number seven. Create specific rules that govern your financial actions and decisions.

Making rules for yourself can reduce the power that emotions have over your decisions. We need clear rules that help us protect against ourselves, right? So things like I always max my retirement savings. And, you know, whatever rule you decide, but you pick a rule and you make it clear that it's a rule. For example, you might set a rule for yourself that you only dine out at restaurants or order takeout from restaurants once a week or once a month. You might also set additional parameters like you only do it on the weekends, or you only go to restaurants with certain friends. In other words, you only go if it's a social outing,

not if you just don't want to cook that night. Technology can help us automate these rules to some extent. So if you want to save a certain amount of money for a certain goal every month, you can automate that. You don't need to review your spending after every transaction, which can be tedious and which can be hard to stick to in the long term. You simply set up the automation and then let it hum in the background. And so that is key takeaway number seven,

make rules for yourself so that rather than making financial decisions from a place of emotional reactivity, you are instead making financial decisions from a place of the guidelines, the rules, the principles that you have laid out for yourself. Key takeaway number eight. Evaluate how much happiness your past purchases have given you. One quick and easy way to save more money and to prevent buyer's remorse is to review your transactions and ask yourself how much happiness you gained from a given purchase. Let's say we looked at your January spending.

Let's figure out how much happiness did they give you? As much as you expected, more than you expected, just as you expected. When we do these kind of experiments with people, we find lots of things that people said, oh, you know, I didn't get as much happiness from this than I expected. And that's a good indication. That's a category you might want to spend less money on. Research that Dan cited in this episode said that dining out is a category that most people say did not bring them sufficient happiness to justify the cost because most people tend to overspend on drinks and food.

By looking at your past purchases, let's say that last month you spent $200 on takeout. Did it give you $200 worth of joy? If not, then that's an indicator that you should build some rules for yourself, set some parameters for yourself around how and when you'll order takeout so that you can start to spend your money in ways that maximize happiness. And so that is key takeaway number eight. Finally, key takeaway number nine, you've got to protect your own goals because no one else will. So to cap all of this off, you need to protect your goals and your money because nobody else cares about your money as much as you do.

The thing about life is that other people are trying to mess up your goals. Think about something very simple. Like, you go to the supermarket and you have a goal. You know what you want to buy and you want how much you want to spend. But the supermarket also has a goal. And the supermarket goal is not the same as yours. And guess what? They control the environment.

Once you've created a set of rules that govern your decision-making, this should become much easier. again, because you won't be making choices, spending choices, based on emotional reactivity, you'll be making those choices based on the rules, the parameters, the guidelines, the principles that you've laid out for yourself. So, for example, if you have a rule that when you go to the grocery store, you only buy the things that are on your list, and if you impulsively see something and you want it, you don't buy it then, you put it on your list and you get it on your next trip to the grocery store

a week later, setting a rule like that for yourself can help you avoid impulsive, emotionally reactive decision-making. And ultimately, that lets you save more of your money and then spend that money in ways that maximize happiness and maximize utility. So those are nine key takeaways from this conversation with Dan Ariely. Thank you so much for tuning in. As a reminder, once again, we have opened the doors for our rental property investing course. Today, Monday, May 18th, 2020 is the first day of enrollment week. We are keeping enrollment open for one week only, so our doors will close on Monday, May 25th, 2020. So if you'd like to join our course, if you'd like a structured, guided online course that teaches you how to be a smart, savvy,

well-organized rental property investor, come check out all of the details at afford-anything.com slash enroll. That's afford anything.com slash enroll. Also, for those of you who are early birds, here's a special bonus. On Thursday, May 21st, at 6 p.m. Pacific, 9 p.m. Eastern, I will be hosting a special bonus office hours. Now, office hours are live Q&A Zoom calls in which the students in the course join me on a Zoom call and ask any questions that you have about rent, property investing or investing or money or life. Now, if you're a student in the course, you get lifetime access to all of the office hours that we hold, but we are hosting a very special bonus session this Thursday, May 21st, that will be open to the alumni of the course

and to the students who sign up early, the students who sign up in the beginning of the week. So if you think you want to enroll in the course, enroll now and then join me at office hours on Thursday. Again, you can get all the details, much, much more information about what's inside the course, who's it for, will it apply to your situation. We cover all the FAQs at afford anything.com slash enroll. That's affordanything.com slash enroll. Thank you so much for tuning in. My name is Paula Pant. This is the Afford Anything podcast. If you enjoyed today's episode, please share it with a friend or a family member. And make sure that you are subscribed to this podcast so you don't miss any of our awesome upcoming shows.

On our PSA Thursday episode this week, we will be talking about philanthropy in a time of pandemic. How can you improve the lives of your friends, your neighbors, your community, in the broadest sense of the word. Giving time, giving money, giving knowledge. We will be talking about that on this week's PSA Thursday episode. And then next week, Monday's episode, I'll be answering questions that come from you, the community. So again, make sure you're subscribed to this podcast so you don't miss any of our upcoming episodes. Thanks again for tuning in, and I will catch you. in the next episode.