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As you get older, life gets more complicated and you gain more financial responsibilities. You face daunting questions like, should I get a credit card? Should I take out student loans? And should I invest my money? It can feel overwhelming to figure out how to make good financial decisions, but the more you know, the better prepared you'll be to face financial challenges.

My name is Yanely Espinal, also known as Miss Be Helpful. I'm a financial educator, and I'm really excited to welcome you to NOVA's Financial Lab. In this lab, you'll learn the science behind our behavior and decision-making when it comes to money, and you'll use it to develop habits that can actually increase your financial well-being.

First, let's take a step back and define financial well-being. Financial well-being means having financial security and financial freedom of choice, both now and in the future. Financial security means being able to pay for your day-to-day needs, like covering your housing and food costs. It also means being able to weather an emergency, like unexpected medical expenses.

Financial freedom of choice means having the ability to buy things that make you happy, such as going out to eat with friends. It also means being on track to meet your long-term goals, like being able to pay for a vacation. Financial well-being is different for everyone, and it depends on what makes you happy. But basically, as long as you can pay for the things that you need and some of the things that you want, both today and in the future, then you've achieved it.

Many factors influence your financial well-being. Let's be clear, some are out of your control, such as the social and economic environment that you're born into. Your family and community have a huge influence on your attitude towards money, your knowledge of finance, and the opportunities available to you.

Since everyone has different financial circumstances, in this lab, we'll focus on what you do have control over, your behavior, how you act in a given situation and make financial decisions.

For example, we've all experienced a time where we've made an impulse buy only to regret it later. Here's the thing. Most of us want to spend less on impulse buying, and we want to save more on our future selves.

But somehow, what we want to do and our actual behavior don't quite match up. Psychologists call this the intention-behavior gap. In other words, it's one thing to know what you should do, but it's another thing to actually do it. Why don't we follow through on our intentions?

Knowing how to manage your finances is helpful, and being motivated will help you, as well. But knowing what to do and wanting to do it is still not enough. Let's see why.

Psychologists have found that there are two main ways we make decisions. The first way is quick and automatic. Think about that daily coffee habit many people have. They stopped thinking about that $5 they're spending every day a long time ago. That's because when we're on autopilot, we tend to do whatever's easiest in the moment, and we don't really think about what it means for the future. Now, the second way to make decisions is by slowly thinking things through.

Narrator Ah-ha!

While this can help avoid some of the mistakes we make when we're on autopilot, we can still fool ourselves into thinking we can fix things later. I'm only spending $5 on coffee every day. I know it adds up, but I'll just compensate by not going out to eat this month. Both types of thinking can make us fall prey to biases, certain tendencies that stop us from achieving our financial goals.

In this lab, we'll focus on the most common biases that influence our decisions about money. By playing three mini games, you'll uncover and identify these biases and practice strategies to overcome them, and hopefully develop a new set of healthy financial habits along the way.

Big disclaimer, we are not providing financial advice in this lab. Each of our financial situations is different, so only you can decide what's best for you. So think about how you can take these strategies from these games and apply them to your own life to achieve financial well-being.

Okay, let's get started. First, you'll need to pick out a pet. This pet will come with you through all three mini games. Happy playing.

These days, especially when we're online, it feels like most of what we see are ads. Ads for the newest look of the season, new gadgets, or even that thing you were just talking about with your friends. With all these ads, it's no wonder we're buying things all the time.

In fact, in 2018, American households spent about a quarter of their income buying nonessential items, things we don't need, but can make our lives more enjoyable. And it feels good to buy stuff that brings you joy, and you shouldn't feel bad for feeling good. But you should think carefully about how much you're spending on nonessential items and whether you're getting the most bang for your buck.

For example, how much happiness are you really getting from that extra item you just added to your cart, just to get free shipping? Whenever we spend money, that's money we're not getting back. We call this an opportunity cost because we lost the opportunity to spend that money on something else.

In this game, you're getting ready to go to a concert and you want to bring your pet, but in order to get them in, you'll need to make sure they can pass as a human, which means you're gonna need to do some shopping. You've saved $110 to spend, you'll need to buy a disguise for your pet, as well as tickets, transportation, and anything else you may want to purchase for the evening.

You'll be scored on how happy you can make your pet. The more happiness points you accumulate, the happier your pet will be. Acquire happiness points by buying items for your pet. For each spending decision, you must buy at least the base item. At some stores, you'll be able to buy additional items or upgrade your purchase to acquire additional happiness points.

You only have enough money for a few upgrades, so pay attention to how many happiness points an item will give your pet. Some items will give your pet more happiness points for less money. Maximize your pet's happiness by planning ahead and making good spending decisions. Okay, you're ready to go.

Have a great night.

In this game, were there items that you couldn't buy because you spent too much, too early? If so, you felt the opportunity cost of making purchases. These earlier purchases cost money that you could have spent on items later on.

A common bias people have when making purchases is opportunity cost neglect. That means that we don't consider what we're giving up when we make a choice. Researchers have found that people often focus only on the spending decision that is right in front of them, and don't imagine alternative uses for their money unless they're pointed out. This is because of selective attention. Without extra effort, we only pay attention to the information given to us.

Nobel prize winning psychologist Daniel Kahneman calls this, "What you see is all there is." When making purchasing decisions, we don't automatically consider alternative uses for our money, and the folks selling us stuff would like to keep it that way.

Opportunity cost neglect prevents people from maximizing their satisfaction with their spending. To maintain your financial well-being, it's important to reflect on which spending decisions really make you happy. For example, is that daily fancy coffee making you happy, or is it just a mindless habit? By considering opportunity costs, make coffee at home for a week and you can afford a nice dinner out with your friends, you might make decisions that better reflect your true preferences and priorities.

In fact, research shows that you can hack opportunity cost neglect by asking yourself a couple of simple questions. What could I use this money for, instead? And would that make me happier than my current purchase? In the game, you could see all future purchases that you could spend your money on.

Another way to think about opportunity cost is to look at the price differences between similar items as residual or extra cash. Instead of simply looking at two shirts and saying, "This one is cheaper," you could rephrase that to, "Buying the cheaper shirt will mean "having extra money in my pocket."

Lastly, if you're worried about spending too much, you can limit your spending and consider your opportunity cost by priming yourself before going shopping. This means thinking about alternative uses for your money outside of what you're buying. For example, if you're going to browse online clothing, first, think about using your money in a completely different way. Buying experiences or social events, like going out with your friends or going on a vacation.

As with anything presented in this lab, remember, you need to evaluate your own situation to maximize your financial well-being. Considering opportunity cost is just one way to help increase your satisfaction with how you spend money.

Try playing again to see if you can achieve more happiness by maximizing your spending decisions.

Let's take a look at these purchases ice cream, groceries, toilet paper, and candles. If you had to separate them into two buckets, how might you group them? Well, you could divide them into food and not food. To be more specific, you could call the buckets food and things for your bathroom. Or you could think of these items as essential and nonessential.

You need to buy groceries and toilet paper, but you don't need to buy ice cream or candles. These buckets are referred to as mental accounts, and this process is called mental accounting, the set of cognitive operations we use to organize, evaluate, and track our spending. If you've ever said to yourself, "Do I need this" or, "Do I want this?"

Narrator Want it.

Then you were doing a form of mental accounting, deciding if something was essential or nonessential. By organizing our spending into different buckets, we can evaluate our purchases and track how much we spend over time, and this will help us make better spending choices.

In this game, you're gonna practice mental accounting by taking care of a new pet for six months. Your goal is to raise a happy and healthy pet. To do this, you'll need to fill your pet's happiness meter by the end of the game, while also paying for its essential expenses and any unexpected emergencies.

Aside from your checking account, you'll also have access to a credit card with a $500 credit limit and a 26.99% interest rate. Build up your credit score by paying for expenses with your credit card, and then immediately paying off the accompanying debt. Be careful. Accruing credit card debt will both cost you in the long run and hurt your credit score. But remember, life happens. Events will occur during the game. You might get a flash deal on an essential item, an unexpected financial gain, like finding 20 bucks on the sidewalk, or an unexpected financial loss, like a medical emergency.

So make sure to plan ahead so that you can weather any financial obstacles.

Good luck.

In this game, you'll take care of a pet for six months, balancing its essential and non-essential needs. But what does this have to do with you? Just like with a pet, you have to budget for your own essentials, non-essentials, and savings. At a minimum, you need to feed and care for yourself to survive. But taking care of yourself also means making sure that you're happy too.

In the game, we advised you to use the 50, 30, 20 rule to evaluate expenses. This is just one way to manage your finances. You might have noticed that in some months, you had to break your budget and that is okay. While it's great to set a budget for yourself, don't be afraid to break it. The important thing to remember is to change how you've allocated your money when the situation changes. Did you think about mental accounting at all in the game? It's certainly helpful when thinking about budgeting your money. However, our mental accounts cause us to treat money differently depending on where it comes from and how we spend it. Meaning that we don't treat all money the same.

In the game, there were times that you unexpectedly received money. If you spent it on non-essential items, you were exhibiting mental accounting bias. A common example of this in real life is when you receive gift money. You tend to spend it on gifts. In your mind, you've already allocated that money for spending on fun things because it was labeled that way when you got it. Now, we're not saying that you shouldn't spend money on yourself, but maybe put part of the gift money into savings for a later bigger purchase.

Being aware of your mental accounts will allow you to adapt them to unexpected events. For example, when you faced emergencies, you had to break the previous mental accounts and move your money around to cover these additional expenses. Hopefully you set aside enough money to pay for your emergencies. While tapping into your savings to pay for an emergency might seem counter intuitive, it's better than going into debt by paying for those expenses using a credit card or a personal loan. Those options have additional costs. One, you end up paying more because of a concept called Interest. And two, your credit score will decrease, which can affect your ability to stay financially healthy.

So while it may not cost you now, it can cost you a lot in the future. Lastly, mental accounting bias comes into effect when we're measuring the value of a deal.

Let's say two stores are having a one-day sale on essential items that you need to buy this month. You can either get 75% off, a $20 item or a free $5 purchase. You can only make it to one store. Which store should you go to? Most people would pick the free option since the perceived value is higher. Free sounds like a better deal, but a better way of framing this choice is, would you rather save $15 or $5? If you treated all money the same, you would have picked the 75% off $20 because it saves you more.

This phenomenon happens all the time when we're shopping. Sometimes we just buy items because they're on sale, but rather than focusing on the sale itself, we should be focusing on the total amount we're spending.

Regardless of how you played this game the first time, what's important is how you set up and break down your mental accounts in real life.

To get more practice, play again.

The financial world can feel overwhelming, like credit card companies, banks, and student loans are out to get you. But if you know how these things work, you may find that they aren't as scary as you think.

In this game, you'll learn to manage investments and debt, things that add or subtract from your overall net worth. Debt is money that you owe, such as to a person, a bank, or a credit card company. For example, when you use a credit card, you're borrowing money from the credit card company. Several weeks later, the credit card company will send you a bill, because you're responsible for paying them back. If you don't pay your bill on time and in full, then you'll be charged an additional fee for borrowing, called interest.

Interest is a rate of growth commonly given as a percentage. Let's say, for example, you borrow $100 from a credit card company that offers you a 15% interest rate. If you don't pay them back within a year, you'll owe the original $100 that you borrowed, plus 15% of $100, adding up to $115. And that's not including any late fees. Then, after the next year, if you don't spend any more using your card, and you don't pay anything off, you'd owe $115, plus 15% of $115, for a total of $132.25.

When money accumulates like this, it's called compound interest. If you're not careful, this is how debt can sneak up on you. Think of debt like a snowball. At the top of the hill, the snowball's not too big. But if you let it roll down the hill, or accumulate interest over time, it gets bigger.

And here's the key. If the total amount grows, so does the interest grow each year, which means that your debt grows faster and faster over time. The higher the interest rate and the longer it takes you to pay it off, the more money you'll end up paying. But here's the good news.

Compound interest works for you when you're investing. Investments are assets that typically grow in value over time, like stocks, bonds, and mutual funds. The purpose of an investment is to generate wealth, to use some of your money now to make more money for the future.

Both your investments and debts get included in calculating your net worth. Your net worth is the total amount that you own. To calculate net worth, add up your assets and subtract your liabilities.

Assets are things that hold positive value, such as cash in your wallet, money in your bank or credit union, investments, or something you own, like a car. Liabilities are things that hold negative value, like debt.

In this game, your pet has taken a peek into the future, and it's not looking too good. While they were able to manage their day-to-day expenses, they forgot to think about their debts and investments. So it's a good thing they've got you and a time machine to try a do-over.

Your goal is to help your pet become a millionaire by balancing paying off their debts and investing their money. You can either use the default amounts that the companies have recommended, or put in a different amount by using the slider. Your pet's daily expenses and emergencies are already covered, so it's okay to use all of this money planning for their future. Once you've selected the distributions, hit Go. Your pet will jump 35 years into the future and see how it turned out. Each time you pay off a debt, you'll be able to adjust your distribution of money. You'll have two attempts to reach millionaire status.

Good luck.

In this game, you were challenged with balancing your pet's debts and investments. These represented simplified versions of concepts we see in the real world, like student loans, credit card debt, and investments. In real life, balancing debts and investments is a huge challenge. How quickly should you pay off debts? Which debts should you pay off first? What should you invest in? When, and how much? When faced with all of these complicated decisions, people tend to exhibit status quo bias.

Research has shown that people tend to make the easiest possible choice, like doing nothing, even if it's against their self-interest. Like you saw in the game, credit card companies often take advantage of this by defaulting monthly payments to be the minimum payment. Paying the minimum every month will just cover the cost of interest, which goes to the credit card company. And it's in the credit card company's best interest, no pun intended, to keep you paying. But some other lenders will set your default payment to be higher than the minimum you can pay.

For school loans, often, lenders will recommend that you pay off more each month than the minimum, because they want you to be out of debt faster, but they also want that money back. While this may be a good strategy for some people, it depends on your other debts and investments.

One way to overcome this bias is to consider every opportunity available to you and make a plan for the future. Next time you play, try out different options instead of using the default suggestions. Another reason why we have difficulty figuring out what to do with debts and investments is because of exponential growth bias. People tend to underestimate how much their debts and investments can grow over time. And the further out in the future, the harder it is for us to see how our money can grow.

In the game, you may have noticed that even though you had the same amount of money for each attempt, the way you distributed the money greatly impacted your outcome. Most people can recognize that it's important to pay off very high interest rate debt. But what do you do when the interest rates start getting close to each other? How big a difference does 5.8% to 6% to 8% make?

Well, if you do the math, looking at the interest accrued over time, you'll see that it makes a huge difference. One simple way we can overcome exponential growth bias is just by doing the math. Ask yourself, how much will you actually end up paying on this debt if you continue to pay at this rate? How much are you earning on your investments? Are you earning more on your investments, or are you losing more on your debts?

In this game, you can visualize this by looking at the total lifetime cost of your debts and the projected value of your investments.

The next time you play, focus on the interest rates of your accounts. Both status quo and exponential growth bias contribute to why people delay setting aside money in investments. It's stressful to think about it now, so we tell ourselves we'll do it later, not realizing that we're losing out in the long run. The earlier you can set aside money in your investments, the more your money will grow. And it doesn't need to be a lot; any bit helps.

But as a reminder, everyone's financial situations and preferences are different. You may not feel as comfortable setting aside money in your investments when you have debts to pay off, and that's okay, as long as you recognize the trade-offs that you're making with your financial choices.

Play again and see if you can overcome your biases and increase your pet's net worth.