Dan Ariely, behavioral economist and psychologist.
Photo: Mary R
Managing money wisely can have a steep learning curve, even for financial professionals. And for college graduates, learning how to spend and save can be even more of a challenge.
Dan Ariely, a professor of psychology and behavioral economics at Duke University, knows this firsthand. Despite teaching at a top business school, he says he still found it hard to resist impulse gadget purchases – a lesson he learned “expensively.”
Ariely used to be a victim of social media ads showing him the latest technology tools with exciting new features. He would click the buy button before thinking about how badly he really wanted the item, he says.
These days, Ariely allows himself a 48-hour “cool off” period before making any online purchases. This strategy helps him think clearly despite the natural excitement of buying a shiny new product.
Learning to be more thoughtful about purchases is just one financial habit that Ariely thinks is important. There are several that he has adopted that he hopes to teach his students at Duke Fuqua School of Business.
“Life isn’t about spending less, it’s about spending better,” he says.
Here are the top four tips Ariely gives his students to help them become financially smarter after graduation.
It can be tempting to expand your budget once you’re getting a steady — and bigger — paycheck every week. But recent graduates would be wise to avoid spending sprees on new or “trendy” things, says Ariely.
He encourages his students to remember the “hedonic treadmill,” a theory that states that regardless of life events or purchases, people always return to their original level of happiness.
“When you get something new, it’s very exciting, but then you get used to it. If you get a new TV, a new sofa, a new dining table, a new car and a new bike in the same week, in a month, you forget all about them. Your hedonic influence on your quality of life will decrease.”
That doesn’t mean that you shouldn’t treat yourself if you start making consistent money after graduation. The key, he says, is to “distance” larger purchases and think carefully about what you’re buying.
For young graduates, the temptation can be great to ask for lots of purchases, says Ariely. Try to resist. “Be very concerned that you might get into debt,” he says. “Young age is an expensive time to get into debt and a really good time to start saving.”
Avoid borrowing money whenever possible, he adds, as it’s one of the top three habits to adopt when entering the workforce. The other two live below your means and make a habit of saving and investing for the future.
“It’s important to maximize your 401(k) deduction. It’s tempting not to and to say, ‘Well, I’m just getting started, I have things to do.’ But it’s important to get things started,” he says, “because compound interest works really well when you’re young. You just have to use it.”
Financial planning is generally about looking ahead. But you would do well to also look at past purchases and reflect on how much you enjoyed them.
In one of his research studies, Ariely asked consumers to look at their past credit card transactions and find out how much they regretted the purchase. The Millennial Regret Spending Study asked over 1,000 consumers aged 20 to 36 which purchases they found regretful or satisfying. Ariely and his team found that millennials found greater fulfillment from longer-term purchases than from impulse purchases (70% and 50% fulfillment, respectively).
Likewise, surveyed adults were 10% happier with recurring purchases than with one-time purchases.
“It turns out there were some things that people regretted,” he says.
He advises his students to reflect on their past purchases and identify areas where they have unknowingly overspent. Weekend shopping was a top cause of regret in the study. Going out, for example, is often expensive as the costs of transportation and food add up.
When it comes to saving money, Ariely jokes that the standard approach is to be “miserable.” Like eating healthy and exercising, he says, one can also choose to feel defeated by a challenging task. Or you find joy in doing what is good for you.
Some say you just have to “work your way through it and do it. It’s not very easy. It’s hard to do something long-term that’s going to be difficult,” says Ariely. But it pays to “find joy” in necessary financial habits like building savings.
As you start saving and gain financial security, take a minute to acknowledge your achievements and do something good for yourself. While Ariely doesn’t advise buying every gadget or accessory that pops up in your social media feed, it’s important to occasionally treat yourself to something you appreciate — whether it’s a night out or a new piece of clothing.
He reminds his students, and all graduates, to consider both their short-term and long-term financial well-being when answering one crucial question: “How do we make ourselves feel good?”
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