If an elephant is out of control, what does it do? It charges. If you and your spouse's spending habits are also out of control what do you do? Charge...on your credit card.
See the similarity?
It's human nature to charge like an elephant. Shopping feels good. We like wonderful food that someone else prepared. We want to have a good time at that once-in-a-lifetime concert or vacation. Why worry about the cost? As long as we can make the minimum charge card payments, we don't even have to have money in the bank to enjoy all these things.
But unlike elephants, humans need to be spend less than they make, set aside part of it for retirement and other savings needs. Ever know an elephant with a 401(k) or an emergency fund? If they did it would only be worth peanuts.
This elephant comparison is explained in more detail in the book Switch, How to Change Things When Change Is Hard by Chip Heath and Dan Heath. The book discusses how our brains know to be financially responsible, but we regularly do the opposite. It's like a rider on a six-ton elephant. The rider may know where he or she wants to go, but unless the rider knows how to lead the elephant, the elephant will end up going where it wants and the rider is helpless to stop it.
But don't despair: there is a way to manage and control that emotional elephant. It doesn't involve logic or rational thinking because that doesn't work with elephants. Use these money tricks to help get your elephant to work with you, and not against you:
Use direct deposit for your paycheck
Get your employer to set up your paycheck to automatically deposit into your bank account. A fist full of cash is hard to resist, but if the money is already in your bank, you and your elephant aren't as tempted to spend it.
Use autopay to pay bills and grow savings
Set up bills to be paid automatically via online bill pay. You can make arrangements with your employer to withhold funds from your regular pay and have it go directly to your 401(k) retirement savings. You can also instruct your bank to do auto-transfers to an IRA or separate savings account to save for emergencies, Christmas and future large purchases.
An old-fashioned trick to control spending is using a cash envelope system for impulse purchase categories such as food, clothing, entertainment and mad money. On payday, bring home enough cash in these categories to last until the next payday. Your elephant impulses can now spend it however it wishes, but when the envelopes are empty, the spending is done.
This works a lot better than using a credit card. Credit cards work fine as long as you pay them off each month. However, the average household that doesn't pay off their credit cards each month have a $15,000 balance. That could mean paying up to $3,000 a year just in interest payments. Wouldn't you rather spend $3,000 on something else?
Pay off smallest debts first
It makes the most sense to start with repaying the debt with the highest interest rate, right? But paying off debt is not fun, so make it easy to see success sooner, not later. Citing financial expert Dave Ramsey, Switch says the best way to do this is to start paying off debts from smallest to largest. Make minimum payments on the bigger debts and toss any extra money at the smallest debt. Before you know it, this smallest debt will be gone.
What do you think would happen if you said to your elephant, 'Okay, this month we are going to save up an emergency fund, make extra payments on the mortgage, save for Dumbo's college, pay off the credit card and save for retirement?' Your elephant would be confused! Better to focus on only one of these at a time, then move on when you've reached your goal.
The main takeaway from Switch is to direct the rider, motivate the elephant and shape your spending. When a couple is doing this together, they can't help but switch bad habits for good ones.