Have you ever automated your savings, used ’rounding off’ to save money or used one credit card instead of multiple cards to simplify things? If you did any of these, you have unknowingly – or knowingly – subscribed to and put ‘nudge‘ theory into real action.
So what is nudge theory and how can it help you with your personal finances and budgeting? Simply put, and as popularized by behavioral economics professors Richard Thaler and Cass Sunstein, involves gently altering the environment in which people make decisions to encourage beneficial behaviors, without restricting their freedom of choice. In other words, you are making small changes for long term positive change to your behaviour. While this article is specific to using this theory to improve personal finances, the concept can be applied to many areas of life, including health, productivity, and decision-making in general.
In the context of personal finance, nudge theory can help you save more, spend wisely, and make better financial decisions—often without requiring drastic lifestyle changes. By implementing small, strategic adjustments, such as automating savings, using cash instead of credit for discretionary spending, or setting up reminders for bill payments, you can create lasting improvements in your financial habits.
Let’s explore some practical ways you can use nudge theory to take control of your finances and build a more secure future.
- Automate your savings and investment: do it once and forget about it, at least for the time being. This is one of the best ways to put the nudge theory to practice. First decide how much you want to save, then automate it by logging in to your bank’s website or app and finishing this setup. Ideally, you would want the money to be taken on the day you get paid, but this is up to you and could set it up however things best fit you. By the same token, you can take things a step further and not just save but automate your investment, where you purchase a specific stock or asset once a week, bi-weekly, monthly etc. Tip: Set up automatic dollar-cost averaging (DCA) for investments.
- Automatically enroll in retirement savings plans (like 401(k)s or RRSP) , especially if your employer offers a matching program. This may be similar to the point above about savings, with the only major difference is that this one is tailored for your retirement. It is easy for younger people in their 20s and 30s – even 40s – to ignore retirement since it is in the distant future. If that is the case, nudge it by making one decision that will take a few minutes to think through and implement, and then be financially set for the future.
- Simplify Choices: Reduce the number of choices you have to make regarding your personal finances, as less usually means more simplicity. Our brains love simplicity, so this would go a long way. For example, limit the number of credit cards you use to avoid overspending and confusion. While this doesn’t necessarily mean keeping just one credit card, since different cards can be used for different purposes and rewards, but it is important not to have too many. For example, I personally keep two cards, one being a VISA and the other Master Card. This not only allows me to shop virtually anywhere – since some may not accept one or the other – each one comes with its own unique loyalty reward programs. Another way to simplify choices is not to have too many bank accounts. Normally, one is enough, but if you have a specific need and need more than one, then it is OK to have a secondary one, but having more than that will complicate things.
- Online Shopping: do you find that every time you go on Amazon or other online retailers that you frequent, that you end up buying something even if you didn’t really need it? You can nudge that behaviour by simply removing your credit card from your profile or at the very least make it more complicated by disabling ‘1-Click‘ purchasing. You can extend this by going through your monthly subscriptions and cancelling the ones you rarely use but have been paying for months.
Nudging may seem effortless and almost visible to the naked eye, but its impact on behaviour can be powerful and long term. Experiment with it by making one simple decision and see how that influences your personal finances, be it with the way you budget, save, use your credit card or something else you would like to improve about how you use and spend your money.