Are Your Choices by Design or by Default?

 

In a recent meeting with a client, they mentioned an expense that they were paying every month for a service they weren’t using. I can relate to this with our Netflix subscription. When we first subscribed, we were using it nearly every night. Fast forward to today, and our latest DVD has been sitting on our counter for several months. I see the charge every month and I beat myself up about spending money on something that we’re not using, yet I don’t do anything to change it.  Does that sound familiar?

Behavioral Economist Dan Ariely has an excellent article titled “3 Main Lessons About Psychology” and in it he details a remarkable study about organ donation rates in Europe (stick with me here, it’s worth it).  When Eric Johnson and Daniel Goldstein compiled the research, there were clearly countries that had almost universal donation rates, and others that had extremely low donation rates.  The difference?

Countries that required you to check a box to participate had low organ donation rates.  Those that asked you to check a box to NOT participate, had high organ donation rates.   

This Default Effect has implications throughout our financial lives.  What expenses do you have, simply because you’ve had them for months or years, but you no longer use?  Do you have subscriptions, memberships, or other recurring expenses that you can trim from your budget, and direct those funds towards your goals?

You can use the Default Effect to your advantage, as well.  Things like your 401(k) contributions happen automatically, so you never think about spending that money.  If you’re trying to boost your savings, can you direct money from your paycheck directly to your savings account?

Having a weekly process of checking in on your spending is critical to not allowing default expenses to chip away at your financial plan.  Think about your defaults, and start to make different choices if your current ones aren’t serving you.


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