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.

Budgets, Cash, and Principles.

During a recent bout with writer’s block, I asked my friends on Twitter (I’m @HJudeBoudreaux) for financial topics that they’d like to see addressed.  One mentioned that they’ve always been told that spending cash can help with budgeting, but she seems to spend more when carrying cash than she does using her credit or debit cards.  This is a case of personal finance being more personal than finance, as my friend Tim Maurer, CFP® is fond of saying.

I often recommend that clients withdraw and spend cash for a few reasons.  Cash is a great scorecard.  It’s easy to look in your wallet and see how much you’ve got left for the week.  It’s also more visually compelling than swiping your credit card, and signing your name, where unless you’re at a restaurant you don’t even have to write the amount.  However, it doesn’t work for everybody.  There’s no magic in spending cash, it’s just one of many tools that clients can use to begin understanding their spending habits.

There’s lots of general advice and Financial Rules of Thumb around that can be helpful to many, but damaging for you.  There’s no magic formula that will help you understand your spending.  There’s no one system or plan that leads to financial success.  There are a few principles that are common among those that I’ve seen make successful changes in their spending habits, and I’ve outlined them below.

  • Track Your Spending.  I’ve written in the past about tracking your spending, and I believe that you can do it in 15 minutes a week, once you get in the swing of things.  It is important to track your spending weekly, since it will give you more regular feedback on your habits, and keep it from becoming the multi-hour project it can be if you track your spending only once a month.  Whether that’s using, Quicken, a spreadsheet you’ve created, a notebook, or envelopes in a kitchen drawer, I’ve seen all of those work.  I’ve also seen them all fail.
  • Have a Bigger Purpose.  Most of what I see tripping clients up about spending are their weekly spending habits, not large decisions like their home or cars.  In order to spend less, it helps to have a very specific goal.  Just like losing 10 pounds is a more achievable goal than ‘losing weight’, saving for a 10 day trip to Italy is easier than saving for ‘travel’.  The clearer the goal you have, the more likely you are to be able to achieve it by saying no to yourself on small decisions every day.
  • Do It For Yourself.  You can’t successfully change a habit for somebody else.  You have to do it for yourself.  The end result can be a benefit for your partner or your children, but if that’s your sole focus, you’re setting yourself up for failure.  Change your habits because it is important to you and you’ll feel more in control, not because you think it’s who you need to be for somebody else.
  • “Incremental Change is Better Than Ambitious Failure”.  That quote by Tony Schwartz resonates deeply with me and has deep truth to offer about spending.  We’ve all gone on crash diets, with food or money, and while we see some quick results we usually end up ordering the extra-large blizzard at Dairy Queen when we run out of willpower.  Making small, sustainable changes in your habits will bring you more lasting success than a few weeks of being on a crash spending diet.

Take small steps.  Commit to yourself.  Act with integrity, not guilt, when the time comes to make a spending decision.  Remember your bigger purpose.  Follow those principles, and whatever system you choose will have a far greater chance of success.

401(k) Fee Disclosure – Cutting Through the Jargon

After many years of waiting, the 401(k) Fee Disclosures are finally here.  If you haven’t received yours, you will likely be getting one in the mail in the coming month.  401(k) plans have a lot of expenses wrapped into the costs of the plan and it’s been hard to pinpoint exactly how much clients were being charged in the past.  The new forms aren’t perfect, but they certainly are a step in the right direction.

Your form should show what each investment option available inside of your 401(k) plan costs you per $1,000 invested.  It should also show on your quarterly statement how much is deducted from your account to cover plan-level fees, like the cost of administering the plan.  Many employers spread these costs out over the account balances of all employees, so as your account balance grows, you’re paying a greater percentage of the fees of the plan than new participants are.  Here are some of the other terms I’ve seen that clients often don’t fully understand.

  • Revenue Sharing Offset – Some 401(k) plan providers have received compensation from investment managers in exchange for offering their funds inside of a 401(k) plan platform.  This revenue sharing either was passed along to the plan sponsor (i.e. your employer) or the plan provider simply retained the additional income.  One way that plans did this was through 12b-1 fees
  • 12b-1 Fees – Mutual funds have an expense ratio that covers the expense of the fund’s operations, and some funds also have a separate 12b-1 fee.  This fee is for ‘marketing, distribution, and other services’.  Essentially, it’s money that pays for things like Revenue Sharing Offsets, or is paid as a sales commission back to a selling broker.
  • Expense Ratio – This is the meat and potatoes of what it costs you to own an investment.  Funds deduct this amount from the mutual fund’s activities to cover everything from employing a fund manager and analysts, to putting out prospectuses.
  • M&E Fee (or Mortality Risk & Administrative Fee) – Some plans are offered through insurance companies, and these plans may include an M&E Fee (which is derived from the industry term Mortality & Expense, I realize it doesn’t match up with the more formal description above).  M&E Fees cover a wide range of costs, such as commissions, selling expenses, administrative charges for running the program, and any insurance guarantees that may be offered.
  • Front-End Load – These have largely disappeared from 401(k) plans, but other retirement plans may still have them.  A Front-End Load is a sales charge that comes off of the top of your deposits into your plan.  This amount typically goes to the selling agent, and can range from 1% to 5.25% on the high end.

One last note – just because you’ve chosen an investment option in your 401(k) that is traditionally low-cost, it doesn’t mean that the one inside of your plan is.  This great piece by Brent Hunsberger of The Oregonian details the huge expense difference between an average S&P 500 Index Fund and the one that was being offered in a reader’s plan.  Take a few minutes to read and understand your disclosure form when it arrives, and make choices that are right for you and your future.

Do you have any questions about the new 401(k) Fee Disclosure Forms?  Are there other investing terms that you have questions about?  Please let me know!

Most Read Posts – July 2012

Word Cloud of words posted in the blog – July 2012 (

Below are the 10 most viewed posts on the Upperline Financial Planning Blog in July 2012:

  1. 6 Tips For Refinancing Your Home – Financial Rules of Thumb Series
  2. It Takes Time
  3. Student Loan Consolidation Deadline June 30th
  4. On Positive Action in Light of Tragedies
  5. Financial Rules of Thumb Series – How Much Should My Car Payment Be?
  6. 100 Minus your Age? – Financial Rules of Thumb Series
  7. Life Is But A Dream
  8. You May Not Like the Choices you Have, but You Do Have Choices
  9. My 6 Favorite Business iPad Apps
  10. Lending Money to Adult Children? 4 Points to Consider

Life Is But A Dream

I was sitting at dinner last night with my wife and daughter, who is really into singing “Row, Row, Row Your Boat” lately.  As we sang the song twenty or so times at dinner, I did look at the two of them and realize that all of the good things in my life were just a dream to me, not that many years ago.

My wife, my daughter, the home we live in, my business, and so many other things that we enjoy in our life every day is something that I hoped for, and that we set out to create, together.  While singing the song over and over, I started to think about the lyrics and how they relate to our life.

  • Row, Row, Row Your Boat.  The life we enjoy today was not just because of our dream, but the work that we have put into it, together.  I want to continue to dream of the things we can do together, and work every day to achieve them.
  • Gently down the stream.  My friend Ed Jacboson reminded me recently that we too often think life is ‘yes, but’, instead of ‘yes, and’, as in “Yes, things are good, but they’ll be great when _______ happens.”  Far too many times I strive and stress and worry, and it takes away from the joy that we all share together.  I want more from life, and I want to be aware of the fullness that we have in the present moments that I easily miss.
  • Merrily, Merrily, Merrily, Merrily.  For those of you that know me, you know I can be a fairly serious person, and I’ve been that way since I was a kid (shocking, I know).  The greatest gift I’ve received from my daughter is her love and laughter.  I want to be more merry and for us to create more moments for us to laugh as a family and enjoy each other.
  • Life is But a Dream.  Today was yesterday’s dream, and I want to be more present.  We all have wonderful gifts in our lives, even if we don’t always see them.  My goal for the coming weeks is to see and appreciate those gifts and share them with those closest to me.

Where are you rowing your boat?