Applying the Peak-End Rule to Personal Finance

The peak-end rule is a psychological phenomenon that indicates which parts of a past experience we recall and use to define that experience. From Wikipedia:

According to the peak-end rule, we judge our past experiences almost entirely on how they were at their peak (pleasant or unpleasant) and how they ended. Virtually all other information appears to be discarded, including net pleasantness or unpleasantness and how long the experience lasted … One everyday example of the peak-end rule is how when someone eats a sandwich, they judge its tastiness solely on the basis of the filling in the middle, and the crust on the far end, which is eaten last. Thus the other parts of the bread are irrelevant, and most restaurants will take advantage of this.

I was first made aware of this phenomenon by a posting at which relates this phenomenon to optimal vacation planning; one should plan for a great experience in the middle and a strong end to a vacation if one wants to remember it in a positive light.

It occurs to me that this phenomenon applies to personal finance as well, particularly when one is just getting their feet wet. In terms of a budgeting period, one can use the peak-end rule to create a very positive later impression of a period of financial adjustment simply by using the peak-end rule.

For example, I decided several months ago to carefully manage my finances on a monthly schedule, believing that if I could set a “feel-good” example for the first month, it would be much easier to continue sticking to that budget. It worked, but when I reflect on this experience, it does match the nature of the peak-end rule.

If you’re considering creating a budget and sticking to it for the first time, try the following plan, which utilizes the peak-end rule to create a positive memory of the experience of budgeting and saving.

With the peak-end rule, you want to create a strong peak somewhere in the middle of the month and finish strongly at the end of the month. So, set up a monthly budget for yourself, then divide each amount in half, as you’ll want to see where you’re at at the end of the half-month. When the first fifteen days are up, go through the budget and see where you’re at. If you’ve been committed to the budget for those two weeks, you’ll experience a very positive feeling as you realize for the first time that it’s actually working. I also recommend making a savings deposit at that same point in the month to encourage a strong positive feeling – deposit it into a high-yield online savings account (or other easily viewable investment account) so you can keep an eye on it.

At the end of the month, figure up the budget again. The mid-month peak should have encouraged you enough to tackle another two weeks of budgeting your money, so when you do your final budget at the end, you’re right on track with some saving or debt reduction over the period of the month – a really good feeling. You also can check your investment account and see if your new budget has actually earned money over that period, another good feeling.

Later, when you recall that first month of budgeting your money, it will bring about a very positive feeling from within, encouraging you to be more money conscious in the future.

Naturally, you can utilize this phenomenon for other financial situations as well, but it is very useful for periods when you’re trying to adopt healthy new habits.

Loading Disqus Comments ...