When I quit my job earlier this year to go all-in on this blog, I knew that I had a few housekeeping tasks that I needed to complete. This included rolling over my 403b to my Solo 401k and getting health insurance before my 60-day COBRA retroactive period came to an end.
Of course, both of these tasks, while seemingly pretty simple to do, required more than just clicking a button. I’d have to, at a minimum, click multiple buttons. And in many cases, I might even have to print out some forms or call someone – two things that I, as a millennial, never want to do!
What ended up happening is pretty predictable. I never did do that 403b roll over and it’s now been on my to-do list for 8 months, staring me down every time I open my Google Tasks app. Luckily, my 403b isn’t the worst, but it’s not the best either. And it forces me to pay an extra administrative fee that I definitely do not need to pay.
The health insurance thing was more stupid on my part. You get 60 days to enroll for health insurance after a qualifying event (in this case, losing my health insurance when I quit my job). As you can probably guess, I failed to sign up for health insurance during that 60-day enrollment period, which left me in limbo until the next open enrollment period. To bridge the gap, I signed up for a healthshare ministry. It costs me $120 per month and seems fine, but I’m personally not that comfortable with this sort of pseudo-insurance.
All of this leads me to the general point of this post. I think one of the biggest barriers to financial success isn’t necessarily that we don’t know what we’re supposed to do. It’s that there’s stuff in our way that makes it harder for us to do the things we know we’re supposed to do. Saving money, investing, doing smart things with our money – we all know that we’re supposed to do this. But the actual act of doing all of this isn’t always so straightforward. It requires learning and research and figuring out weird online interfaces and maybe even possibly talking to people or filling out forms.
The more things you put in someone’s way, the less likely they are to do it. This is what you call friction. And friction is the reason that a lot of us, myself included, fail to get started with the things we know we’re supposed to do.
Friction – The Thing That Stops Us From Getting Started
An easy way to understand friction is to look at how your favorite websites and apps work. Think about a company like Amazon for example, which goes to huge lengths to make it so you can buy something on their site with as few clicks as possible. This isn’t an accident. Amazon knows that the more clicks you have to do, the less likely you are to complete your transaction.
Friction is one of the reasons that I think bikeshare systems seem to struggle when they go toe-to-toe with scooter companies like Bird and Lime. These scooter companies do a lot to make their systems as frictionless and easy to use as possible. You use one app and there’s only one way to use the scooters. Compare that to a traditional bikeshare system, which often comes with multiple types of membership options, unclear and often confusing pricing, and different ways to signup to use a bike. All of these things confuse people and add more complexity, which makes people less likely to actually use it.
You can see the same friction problem when it comes to trains and buses and it’s why I think more people are willing to hop on a train than they are on a bus. Trains are straightforward – there’s a clear station with easy-to-read maps and easy ways to pay for a ride. In contrast, a bus requires some initial upfront work to get started. You have to figure out where the bus is going, understand how to pay for the bus, and even find the actual bus stop, which is often nothing more than a pole in the ground with no other information.
The point is – the harder it is to get started with something, the less likely you are to do it.
Friction In The Personal Finance Space
One of the most common examples of this friction problem when it comes to personal finance is with automatic enrollment in workplace retirement plans. A little while ago, employers didn’t have the option to automatically enroll their employees into these plans. Instead, employees had to proactively choose to do this. The mere fact that employees had to take the initiative to enroll meant that enrollment rates were lower than if employees were automatically enrolled in their plans. Once employers started to automatically enroll their employees into these plans, enrollment rates went up.
My first job at a biglaw firm automatically enrolled us in our workplace 401k. It’s the only reason I did any investing at all during my first few working years since at the time, I knew absolutely nothing about investing or how to get started. Even though I didn’t invest much during that time, at least I was investing something.
My last two jobs, however, did not automatically enroll people in their workplace retirement plan. Specifically:
- My state job had a governmental 457 plan (which is a very advantageous tax-advantaged account). The process to enroll in the plan wasn’t hard, but I had to actively go to my employee portal and designate some percentage of my income into the plan. My guess is that because of this step, a lot of people probably didn’t take advantage of the 457.
- My non-profit job didn’t have auto-enrollment in the plan’s 403b plan. It also wasn’t particularly easy to enroll in it since I had to actually schedule a time to talk to some financial guy on the phone and literally tell him what I wanted to put my money into. To make things more complicated, the 403b plan didn’t have an online interface that let you pick your investments or even see what investments were available. The only information I could get had to come from the financial advisor guy. I’d bet a significant number of people at my old job are not participating in the plan simply because it requires so much work to get started.
The impact of friction is why I like robo-advisors so much and why I often point new people towards robo-advisors over just directly investing it themselves. A few years ago, I pointed a friend to Vanguard when he was looking to start a Roth IRA, as he’d heard that he should probably start saving some money for retirement. But after he opened his account, he had no idea what he was supposed to do next. I had the same thing happen to me when I opened a Roth IRA back in college. I opened it, had no idea what I was supposed to do next, then ended up doing nothing for almost a decade.
Robo-advisors do what I think is one of the most important things in personal finance. They reduce friction by removing as many steps as they can and making things as easy as possible.
Things I Haven’t Done Yet Because Of Friction
I have a ton of things that have been on my to-do list that I still haven’t completed, simply because the process to do it isn’t straightforward or because it takes a little more effort to actually get started. These include the following:
Rollover My Old 403b into My Solo 401k. I’ve already mentioned this, but this is something that has been on my to-do list for the entire year, yet I still haven’t done it. Doing this requires me to print out some forms, mail some stuff out, and do a bunch of other stuff that I just haven’t been able to get started with. That’s not an excuse, but if someone like me – a guy who is pretty knowledgeable and obsessed with money – gets tripped up getting over that initial hurdle of filling out forms and mailing things in, imagine how much harder it is for someone who has no idea what they’re doing.
Open A New HSA. My current HSA actually isn’t bad, but I’ve been meaning to switch it up for a while. I have my HSA with a company called Further, which is the company that my employer used for their High-Deductible Health Plan. This meant I needed to use this HSA if I wanted to get my employer contribution ($800 per year if I did a health exam). Payroll deductions into your employer’s HSA are also advantageous because any deductions are not subject to FICA taxes, so I took advantage of this plan to reduce my FICA taxes.
The Further HSA isn’t bad since it has good investment options, but it does require me to keep a $1,000 cash balance to gain access to the investment options. This is an unnecessary cash drag that I could avoid simply by using another HSA. I’ve been meaning to switch it over to Lively, which seems like it has an ideal HSA for my purposes, but again, friction is slowing me down from making this move. I actually don’t even know what the process is to roll over my HSA to another HSA.
Open a Roth Solo 401k. I’ve used my Fidelity Solo 401k for the past three years and it’s still the perfect account for me to use as my rollover account for any old pre-tax workplace retirement plans. However, the current tax laws provide a 20% pass-through deduction for 1099 income, which makes the value of the pre-tax Solo 401k not as advantageous as it used to be. Instead, it’d likely make more sense for me to take advantage of a Roth Solo 401k.
Fidelity has what I think is a good, simple Solo 401k plan, but it doesn’t have a Roth option. Vanguard does have a Roth Solo 401k option and from what I can tell, it looks like they charge $20 per year for each fund that you’re invested in. That seems like a reasonable price, especially since I can just keep it simple and put it all into a Total Market Index Fund like VTSAX. I just need to actually open my Roth Solo 401k.
Get Health Insurance. This is a big item that I absolutely need to get done by December 23rd. The only thing that holds me back from figuring this out is that there are seemingly a million options and I have no idea which plan I should pick. I seriously wish there was an easier way to do this!
The stuff we have to do with money is pretty straightforward. And really, you only have to get a few things right to be successful with it. But often, all of this stuff isn’t as straightforward as it should be.
Friction is the killer and it’s what can stop you dead in your tracks with whatever it is you’re looking to achieve. Companies like Amazon or Uber figured this out a long time ago – make things as easy and frictionless as possible, and everyone will use your app.
So, do whatever you can to remove friction. This means automating your finances and having a good money system in place. Use whatever apps will make things easiest for you. The less friction you put between your money goals and your money, the more likely you are to actually get started and do the things you know you’re supposed to do.
No offense but what you call friction, we used to call laziness. For example, re: COBRA – my recollection is you get an enrollment packet in the mail. You fill it out and send your check. Maybe now you can enroll and pay on-line. They mail it to you to fulfill legal requirements of notification. That was too much “friction” for you? You ride your bike in the middle of Minnesota winters, will pick through endless garbage & cobble together 23 side gigs and write a blog but it’s too much work for you to mail in a form or fill out an on-line form or talk to someone on the phone?
Is this a parody post to show how millennials are ruining everything? Is this a spoof of how millennials don’t eat cereal because it is too much work to wash the bowl after eating the cereal?
My Money Wizard says
I thought this was a great post and a really interesting concept.
A similar idea I’ve had is that willpower is a muscle. It can be exercised, and your capacity to stay disciplined can be improved. But willpower can also get fatigued, because it’s a limited resource. So despite what Dan up there was getting on you about, it’s probably precisely because you’re busy running a successful blog and side hustling your a$$ off that these chores kept getting pushed to the bottom of your to-do list.
IMO the important take away is that because of friction, we hype up a lot of chores as being much harder than they really are. It seems the solution is to stop thinking and just do it, because that both preserves your will power and overcomes the idea of friction.
Financial Panther says
Good points about the willpower. I get lazy with some things and hardcore about other things.
Here’s a great example of friction in action. Someone on Instagram just sent this to me as a good example: https://www.instagram.com/p/B59rB7vngUp/?igshid=19l6bq8yf40u0
Financial Panther says
Naw, friction and laziness are two very different things. Friction is that small obstacle that makes something just a little bit harder to the point that you won’t do it. Think about how a gym membership makes you go into the club, talk to someone, then cancel it when they could easily have it be completed with one click on a website. That isn’t laziness. That’s friction.
You can work hard and not be lazy, but still not do things because of friction. Amazon, Google, Facebook, Netflix, etc – these companies all learned long ago that if you want to get anyone to do anything, you remove as much friction as possible. Very different then being lazy.
Wow, you kinda got flamed. Your point is valid and it applies to boomers like me as well. However as an engineer it takes a lot of friction to stop me because I view friction as an assault on my reputation as being the smartest guy in the room. I am proud to announce that I did finally get my wife’s Roth deposit made for 2019. Mine was much easier (less friction) and I got it done months ago. I also got my HSA funded for this year but it is fairly low friction though I did have to drive to the bank and write them a honest to goodness paper check. And hey, laziness can be a beneficial trait. As an engineer who started work in the early days of personal computers my laziness at doing horrendously complex calculations led me to write software that completely changed the way engineers worked at my company. That started people seeing me as brilliant and nobody noticed the lazy streak so I eventually made a lot of money as I moved up the ranks. Still lazy now and no longer working a 9 to 5.
Financial Panther says
Yeah, I think my point was a valid one. The way I like to illustrate friction is to think about the difference between a bus and train and why a lot more people seem willing to ride a train vs. ride a bus.
Think about all the friction involved with riding a bus. You have to figure out how to pay. Figure out where the bus stop is. Figure out where to get off. Figure out where the bus is even going.
Contrast to a train. You know you can pay at the station with a card. You know where it’s going because you can see it on a map and it’s more clearly marked. You know where to find the train and where it stops because it has big train stations.
Little obstacles that are easily traversed. But just requiring a little extra step makes it more likely you’ll opt to do something else (instead of a bus, you’ll grab an Uber, for example, which requires one click).
I think the right word for this here is what people like to call “the culture of now.” With all the latest tech, people are used to having everything now, this moment. We cannot wait hours anymore to download something. We will not wait 10 days for an online order. People, packages, and even news used to travel for days or months. Nowadays, everything happens so fast and effortless. If a certain thing will take more time than usual to complete or more steps, we automatically get turned off because we know there is a faster, easier version available. It’s a normal thing today and kind of scary.
I grew up in a war zone in the nineties and we hade no water, electricity, cosmetics or food for years. After being able to use all those things, like the rest of the modern world, we were suddenly cut off. We had to go back to doing things the way they were done 100-200 years ago. Of course, we didn’t have internet, apps, amazon or facebook, but it was very hard, as you can imagine, to adjust. I wonder what would happened today if we had to go back to the middle ages? How would these younger generations adjust? Whatever we might call it, friction or laziness, it doesn’t teach us anything good. It postpones getting things done, and there are usually consequences for that. It also trains us to be lazy and gives us hope that problems may resolve by themselves, and that is usually not the case.
Financial Panther says
I definitely see what you mean about the now culture, although I’d argue that this has been true since the dawn of time. As things get more efficient, it’s natural for us to expect things faster (and honestly we should get things faster).
One thing I do want to note is that I think there’s a big difference between laziness and friction. Laziness is just not working. Friction is something else much harder to see. Here’s an example. I was in Indianapolis recently and needed to get to the airport. But, the bus system there has no mobile app that makes it easy for me to buy a ticket. Instead, my choices were to either use cash, which I didn’t have on me, or go to some transit center that wasn’t near me to get a bus ticket. I ended up just opting to take a Lyft.
That wasn’t laziness. It was because of the barriers that went into using the bus that made me opt not to use it at all.
Great points. As for the issue of laziness, sure if we’re bingeing Netflix rather than taking care of some of this stuff, that’s definitely laziness. For most people most of the time though, I think we just don’t fully appreciate the benefits, and so the friction makes the costs seem to outweigh those benefits. In the short term, the task just doesn’t seem to be a productive use of our time when we have so many other priorities.
There’s also another issue, at least for me, and I’m assuming I’m not alone on this–the more that technology and efficiency improves, the less patience I have with unnecessary bureaucracy. For example, I was entitled to $300 in travel reimbursements from my employer. I’m certainly not lazy, and I certainly appreciate the value of that $300. But I procrastinated on doing what I needed to do to get it, because I knew it would take at least 30 minutes to an hour, along with probably a few follow-up phone calls before I’d get the money. In my world of Venmo and Amazon Prime, that is unacceptable. If I knew there was just no better way, I’d deal with it, but I know that’s not the case. Instead of my employer updating their processes so that it takes 10 minutes–something I know is possible–so that I can go use my time more productively, I have no choice but to waste an hour or so from my day. I resent it, it makes me grumpy, and so I put it off. It sounds like that’s the case with a lot of the examples you gave above. There’s no reason that most of the things you listed should take more than 5 or 10 minutes, but I suspect each will actually take several hours. What a waste.
At the end of the day, it doesn’t really matter WHY friction stops us dead in our tracks, even if it is that we’re lazy. From a personal, business, or public policy standpoint, the point is just that friction does stop us, for whatever reason, like you said. And we know that removing it does help people do the things they should be doing. Thankfully, things like automating are at least getting easier, even if there’s still plenty of room for improvement.