Fuel or Friction?

Richard Connor · Jun 15, 2023 · 13 replies

Richard Connor | Jun 15, 2023

I RECENTLY LISTENED to an interesting Hidden Brain podcast discussing different ways of bringing about behavior change. The guest on the podcast was Loran Nordgren, a professor at Northwestern’s Kellogg School of Management and coauthor of a book entitled The Human Element. The discussion centered on two related concepts: fuel and friction.

Fuel is the stuff we use to motivate ourselves and the people in our lives. It can be positive or negative. Let’s say you’re an employer trying to get employees to save more in the retirement plan. To fuel their participation, you might explain the benefits of compounding, tax deferral and the employer match.

Friction is the stuff that produces drag—things that hold us back or create obstacles that prevent us from acting. Continuing with the example above, a website that’s hard to navigate could prevent employees from signing up for the company’s 401(k) or increasing their contribution.

Nordgren contends that, “Removing friction is often more powerful than increasing fuel.” He provides a variety of interesting and amusing anecdotes to support his thesis. One of my favorites stories was a self-acknowledged failure. Nordgren described how, despite many attempts at fueling, he couldn’t convince his 95-year-old father to get a cell phone. He concluded he’d have been better off finding a way to make it easier for his father to embrace technological change.

I’m a big fan of reducing friction in our financial lives. Today’s technology makes this easier than ever. Here are my favorite ways to reduce financial friction:

Automate savings. Thanks to direct deposit, it should be simple to direct some of your paycheck to your savings goals, as well as to your regular checking account. My wife and I have both a checking account with a brick-and-mortar bank and an online savings account. They’re tied together so I can transfer money between them if required.
Automate bill paying. Again, the banking technology is available to automate most or all of our regular bills. Some companies will even give a discount for automated payments.
Automate retirement savings. Sign up for your employer’s retirement plan, being sure to capture at least the employer match. Better yet, try to save a little more than you’re comfortable with, and see if you can learn to live on whatever remains of your paycheck.
Automate transfers to an investment account. This has become very easy to do. Once you’ve established an account, also be sure to automatically reinvest your dividends, so you acquire even more shares.
Automate withdrawals. We have cash investments in my IRA from which we take planned monthly withdrawals. This is new this year, and I’ll monitor this to see if it’s the right amount or if we can hold less cash. If it proves insufficient, it’ll tell me we’re spending more than I realized.
Automate debt payments. If you have a mortgage or other loan, many companies will offer an interest rate reduction for automatic debits.

During our working years, my wife and I tried to automate our saving and investing, leaving a relatively meager amount in our paychecks for us to spend. I wouldn’t recommend making it so tight that you end up with credit-card debt. But make it meager enough so that you have to think hard about that next splurge.

Fuel or Friction?

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