Live within your means, save for the future, reduce debt, etc. We know the simple laws of money, so why do we have trouble following them? Though we’re all wired differently, our brains prefer to take the path of least resistance. We also tend to underestimate the odds of future problems while overestimating the value of current pleasures as Harvard Professor Dan Gilbert discusses here.
So where does this leave us? Well, debt ridden, broke and spending retirement sleeping on our kid’s couch eating cat food unless we do something about it. Here’s a high-speed, low-drag tool to help manage your spending: the OODA loop.
Aside from being a great name for a cereal, OODA loop is the name of a decision-making model developed by Colonel John Boyd, an Air Force fighter pilot. Though the theory was originally developed as a military concept, it is now used in business and sports as well. OODA stands for: observe, orient, decide and act–representing a recurring cycle or “loop” we use to make decisions. Here’s a breakdown of the process:
- Observe: Collecting information.
- Orient: Analyze and process information.
- Decide: Choose a course of action.
- Act: Execute your chosen course of action.
This process is much more complex than represented by the model and the model is much more complex than I’ve explained (likely to the chagrin of military enthusiasts), but it suits our needs (learn more about the OODA loop). The idea is to have your OODA loop, or decision-making process, tighter than your enemy’s. The tighter your OODA loop, the faster you make decisions–or stop bad ones. If you can make decisions faster than your enemy, you can get ‘inside their loop’ and defeat them.
So why all of this talk of war and who’s the enemy? When trying to control your spending, the enemy is yourself. Remember how we talked about your brain taking the past of least resistance? Your brain has a much easier time being primitive, following poor spending habits and failing to plan for the future. This is what it wants to do naturally, just as water runs downhill. We need to get inside our own bad spending habit OODA loop.
Some examples of this may be asking yourself why you’d want to spend the next 5 years with expensive interest paying off an over-hyped new car you’ll be tired of in three months when a more reasonable (used?) car would work. Or maybe it’s deciding against spending $300 on that new purse/shoes/whatever. Can you really justify the cost? Do you need this to be happy? Are you trying to impress others? What else could you do with that money, pay down debt? How would you feel if you were debt free? Where do you want to be financially in 5-10 years? Visualize your retirement and what you want it to be–it won’t happen by itself.
Come up with reminders that mean something to you and use them in these situations–get inside your own OODA loop and stop those poor financial decisions. Remind yourself that you can afford more after you pay off your debt–the money you save in interest adds up quickly. Figure out how much you pay in interest annually, you’ll be surprised. Do you work for yourself and your family or for the credit companies? Stop giving them so much of your money!
Just as in war, the better we understand our enemy the better we can fight it. Will this strategy solve all of your financial woes? No, but it’s another weapon in your arsenal and another way to look at things. As you learn more you’ll discover what strategies work best for you on your path to achieving financial independence.