In this episode, learn:
How making pacts can help you stick to your financial plan
The 3 types of pacts that can help you reach your life and financial goals
If you're new to this series, watch the first episode.
Ready to start managing your finances better?
A pact is a pre-commitment that we can use to make sure that if everything else fails, there's a firewall against us doing something we'll later regret.
There are three types of pacts. We have what's called a price pact, an effort pact, and an identity pact.
The price pact
A price pact inflicts some kind of monetary disincentive to doing something you might later regret. If you have a retirement account, for example, there's probably some kind of financial penalty if you withdraw your money before retirement. That's an example of a price pact. How might you be able to institute other price pacts to keep you on track?
The effort pact
An effort pact involves some kind of friction between you and the distraction that might take you off track. For example, you could set a standing instruction with your financial institution to make sure that you invest the same fixed amount every month. If you wanted to disable this standing instruction, you’d have to call the bank and change the wiring instructions. So if you wanted to stop investing, it'd be quite difficult. That’s how the effort pact makes it more likely that you will stay invested.
You can find other forms of friction that you might be able to insert between you and something you might later regret doing. For example, some people freeze their credit cards in a block of ice to make it difficult for them to get to that credit card when they have the urge to spend. That might be a little extreme, but it’s a great example of an effort pact.
The identity pact
Identity packs are when we use a moniker, or a name to describe ourselves, and that helps us stay on track.
For example, a vegetarian doesn't wake up in the morning and say, hmm, I wonder if I should have a bacon sandwich for breakfast. A vegetarian doesn't eat meat because it’s who they are. So if you can find a meaningful moniker for yourself, a way to describe yourself, you're much more likely to stay on track.
Maybe you'll call yourself a generous person - the kind of person who earns money in order to give it away to charity. I even invite you to call yourself indistractable. By virtue of you taking this class, you're the kind of person who strives to do what they say they're going to do. You're as honest with yourself as you are with others. You can proudly call yourself indistractable.
By using these 3 kinds of pacts: price pacts, effort pacts and finally, identity pacts, you can make a pre-commitment today to prevent getting distracted tomorrow.
Like this series? Learn more about financial planning and investing with our courses and events with StashAway Academy. We’ve got you covered.