Nudge theory was popularized in 2008 by behavioural economist Richard Thaler and legal scholar Cass Sunstein. In simple terms it is about making it easier for people to make a certain decision that is ultimately in their own self-interest.
In the short term there are some financial nudges you can do to apply nudge theory to your own finances.
Put your decisions into context – During lockdown, local or national (or whatever COVID-19 throws at us next) do you really need to buy another plant, candle or pair of joggers.
Set simple and clear goals – A single goal like save £6,000 for a car is much easier to achieve than multiple goals like save for a home, car, and holiday.
Make it easier to do the things you should do (and hard to do the things you shouldn’t) – Putting small barriers in the way of everyday things, like not allowing your browser to remember your PayPal password, makes it harder to spend money and you may ultimately decide not to.
Don’t ignore information and the facts – check your budget, bank statements and accounts regularly.
Do you like going on holiday, eating out and enjoying your hobbies? If so, it’s likely your ‘future self’ will too. Far from sitting in an armchair in your carpet slippers and a tartan blanket, it’s much more likely that your future self (who is, after all, still you) will want to enjoy their retirement in style.
So, what’s the dream? Well, according to research from Aviva, almost half of people want to travel when they retire, while taking up a new hobby and helping their children and grandchildren out financially come second and third on the list – all suggesting that people want to live their lives to the fullest in their later years. Unfortunately, translating the dream into reality is where it falls apart for some – 23% of people think their retirement is likely to be a financial struggle.
Living the dream
A study has hit on a novel solution to the problem – ‘nudges’. In other words, by making small behavioural adjustments to your spending habits, you could enjoy an additional £7,000 every year in retirement income.
The key lies in encouraging young people to imagine themselves in the future, rather than viewing their ‘future self’ as a different person.
Understandably, a lot of young people are focusing on their current financial priorities – after all, we’re in the midst of a global pandemic. But that doesn’t mean your future financial needs have gone away. So, rather than thinking of your ‘future self’ as a stranger, treat your pension like a gift you’re giving yourself – you just can’t open it yet!
COVID-19 hasn’t given us many silver linings but reduced living expenses due to remote working and the closure of bars, restaurants and other leisure and hospitality businesses could provide a welcome boost to our savings.
Similarly, you could save around £40 a month by keeping going with the home workouts, like the 72% of people who say they have no plans on going back to the gym. In addition, many kids’ clubs have yet to start back up following lockdown, so parents could be making big savings here, too.
Save on subscriptions
Foregoing the latest iPhone could also save you a hefty sum. Keeping your existing handset instead, and switching to a SIM-only deal, could help you move some welcome funds into the pension pot.
Or, you could divert an average £39 per month in wasted subscriptions into your pension. Unused gym memberships, phone contracts and subscriptions to online video streaming services are all common culprits, according to research.
Expert ‘nudgers’ at your service
If you need a ‘nudge’ from us to help boost your retirement income, we’re just a phone call away.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.