Saving money is a pretty simple process. What’s difficult, is changing our thoughts and behaviors about money, power, status, and things.
Behavioral science researchers in the United Kingdom suggest six behaviors hinder our money management success.
Without a healthy outlook on money and the power, status, or things we feel it provides, we often fail to plan for a financially secure future.
Instead, we get stuck chasing uncatchable prey – eternal happiness and pleasure thrills.
Then, what so often happens is something undesirable – illness, depression, aloneness, death – catches us when we aren’t prepared. Perhaps leaving us both emotionally and financially devastated or worse.
Fortunately, the power to improve our financial lives lies within us. While it may not be easy, we do possess the ability to ignore our wiring for recklessness.
We can improve our financial health. Well before it’s too late.
Why do I believe this?
Because I turned my financial life around. I stopped chasing illusions of success and started reaching concrete financial goals. While I’m not yet financially independent I know I will be someday soon because I read, learn, and practice what it takes to do so.
Not so long ago attaining $1,000,000 in assets seemed improbable, now I know differently. I want you to know too if you don’t already.
It took me far too long to find the right financial path. While I wasn’t completely reckless with money or life, I didn’t always respect it and certainly didn’t understand it. Then life changed. Or actually, I did. Life simplified, and things fell into place.
Although I wish I grasped things sooner, I know it does no good to regret. Sometimes you just don’t know, what you don’t know. And that’s why it’s so important to keep an open mind.
Before you can improve, you need to know what is possible. You also need to know what’s not working and what’s holding you back. This is where I think psychology and behavioral science can help.
Understanding your behaviors and learning to manage them, allows you to gain control. And that’s what I think most of us want. The ability to control our life and money, so money doesn’t control us instead.
Behaviors Hindering Money Management Success
Researchers of behavioral science say that despite our own good intentions, we often consistently undercut our attempts to attain a specific goal in a number of ways. This includes sound financial goals.
In Wired for Imprudence, authors “identified ways in which our own natural thinking patterns can make it difficult to manage money well both day-to-day and in the long-term.”
Just because we know what to do – spend less than we earn, eliminate debt, eat at home, etc. – our natural behavior tendencies lead us astray.
Aptly named, these “six behavioral hurdles to financial capability” identified in the paper include:
- Cognitive overload – Too much on our minds impairs our ability to make decisions and can lead us to choose the simplest but not always the best option
- Empathy gaps – Neglecting the needs and feelings of a future ‘us’ in a different situation for a spur of the moment decision based on today’s at the moment feeling often leads to money spent unnecessarily
- Optimism and overconfidence – Failure to remove the rose-colored glasses for objective assessment on financial matters could be detrimental due to unwavering and unrealistic expectations
- Instant gratification – Indulgence in a thrill today over a larger potential payoff in the future can derail our long-term financial plans
- Harmful habits – Poor lifestyle habits cost us today and increase our costs tomorrow due to their recurrence and future costly health impacts
- Social norms – Our quest to keep up with others in the pursuit of more stuff or momentary pleasures rarely leads to enduring happiness
Source: TheRSA.org
From Talking the Talk to Walking the Walk
Going from what makes financial sense to actually practicing the advice takes effort. But, educating ourselves on financial topics and facing what we know about how these six behaviors hindering our money management success, we can learn to manage them instead of fighting against them.
In Wired for Imprudence, authors identified options for addressing these hindering behaviors but advise much more research, and work is needed to understand what advice works the best.
Ideas to practice include:
- Reducing the adverse effects of cognitive overload by simplifying our finances using ‘rules of thumb.’
- Limiting our number of bank accounts
- Using cash only or using only one credit card and paying the balance immediately
- Automating transactions – bill payment, savings, investing, rebalancing of a portfolio
- Classifying purchases into ‘wants’ and ‘needs’
- Paying off debts before investing
- Establishing an emergency fund of three months expenses
- Addressing empathy gaps by either increasing empathetic feelings for one’s future self, or reducing our power to turn a want into a need
- Institute a 24 hour wait period before making purchases to avoid cycles of want
- Consider developing a list of questions to ask yourself before making a large or sudden purchase; Is this a need? How often will I use it? How long will I use it? Does it get me closer to my financial goals?
- Imagine a future you, including your income and lifestyle. How does the purchase you are considering fit in with your future self?
- Aligning optimism and overconfidence with reality to manage expectations.
- Create a budget to understand income and determine spending and saving
- Research future spending considerations and related expenses
- Wedding and starting a family
- Car and related operating costs
- House, taxes, insurance, and maintenance
- Dealing with instant gratification overlaps other behavior management ideas such as:
- Questioning needs versus wants
- Instituting a 24-hour wait or cool-off period before making a purchase
- Creating a cash-only diet
- Holding a no-debt rule to avoid impulse credit purchases
- Addressing harmful financial habits is critical for financial improvement.
- Calculate the total annual cost of a bad habit – if that doesn’t scare you enough. calculate the lifetime cost if you don’t eliminate it
- Cancel subscriptions or memberships not adding value to your life
- Avoid using credit cards if you cannot pay off the balance in full each month
- Pay off all debt
- Save up for any future purchases
- Discussions on the influence of the media and the influence of peers are encouraged amongst social groups to tackle the social impact on spending decisions. Care must be taken to avoid encouragement of following a negative social norm, however.
Making It Work For You
Learn. Experiment. Assess.
Continuing learning about personal finance and behavior modification. Continuing implementing what you learn. Continuing evaluating your practices and behaviors. (More coming on this in future posts.)
Practice what works. Move forward. Achieve financial freedom. Share with others.
Which of the six behaviors hinder money management success for you? Do you have practices that help you manage it? Please share in the comments.
Be well,
~ Amy
I definitely struggle with a few of these, particularly the cognitive overload. I always feel so refreshed when I have a day not “consuming” data, info and technology… I am now working to limit myself on a day to day basis!
That one does seem to be a biggie. As soon as I hit the car for the commute home from the office it seems I’m yawning; too much information processing all day is wearing my mind out. Good luck with trying to find the right level of info consumption.
Social norms and instant gratification are the 2 biggest issues in our society. I am in LA this week and find myself wanting to spend $100 k on a car because that is how much some of the cars out here are worth. I never felt that way back in Tennessee. Craziness.
Also as consumers we like the thrill of the purchase. It quickly fades, but we somehow forget that when we go to make the next purchase.
So agree, DDD! Removing ourselves from situations like that or pressing the pause button for 24-48 hours can only help.
I’m with AR on cognitive overload. It leads to frustration, too many options, and not only the wrong action, but inaction. And social norms are the downfall for many. It’s not only about keeping up with the Joneses, again there’s an overload. Marketers are on TV, radio, and popping up everywhere on our computer screens even if we deligently remove tracking cookies. We’re being conditioned to want things. A huge benefit of ditching cable TV for us is minimizing exposure to temptations.
Yes, a good point Mrs. G in that often too many options can cause inaction which is often worse than doing anything. And marketing! I’m glad too we gave up cable.
I am also going to agree with cognitive overload being a problem for people. It seems that people with highly specialized jobs also suffer from this based on the mental difficulty of their workloads. Once they are home they don’t want to worry about their finances which therefore causes their net worth to suffer. I’m always looking for ways to help people get over this overload and increase their net worth.
Valid point, Jeff! I think this is also why people often don’t bother with their health too. Too tired to think about what’s for dinner or getting out for some exercise.
I enjoyed this post. It really is about constantly doing the next right thing. First, we have to get our mind right. After we discover the truth, it is easy to move forward toward healthy goals. Healthy thoughts will produce healthy actions.
“It really is about constantly doing the next right thing.” Amen to that. But if you mistakingly do the wrong thing, try again and do it right the next time. Thanks, Dave!
I definitely have a tendency to overconsume information. There’s so much good content out there that it’s hard not to. But I have to remind myself to focus on just doing one thing at a time instead of trying to do everything all at once!
Right, Cato. We are so much better off if we focus and get it done. I need to remind myself too. Thanks for commenting!
This is very interesting and so much more informative than just a list of ways to cut expenses. I can definitely see some of my own behaviors in regards to money management here – which is not a good thing – but I’d never even considered an empathy gap between my current and future self. The extent of that has simply been to think about the bag lady scenario. I’m going to share this in a roundup post to publish on 9-9-17 – so thought provoking!
I’m so glad you liked it and that it gets you thinking. The suggestion for considering how a purchase today fits in with your future self was big for me a few years ago, leading to some significant changes that greatly improved our financial life. Thank you for your comments and sharing. Greatly appreciated!
We’ve suffered from some or all of these at some point, some more than others. Funnily enough, cognitive overload when it comes to my investing approach increased since I’ve come across the concept of FI/RE. Social norms are another big one as a family – I’m beginning to realize that there’s the Joneses and then there’s a level below them that are not big spenders but aren’t active savers either.
Ha, yes, the concept of FI/RE (and all the resulting research) can definitely contribute to cognitive overload. Becoming a blogger can too. 😉 Interesting realization about your social circles. I’m finding behavioral finance fascinating. Thanks for stopping by and adding to the comments!
It all comes down to behaviours, I really like the simple way you lay it out.
Thanks, Xyz. Yes, understanding and controlling our behaviors will get us far.
I really like these descriptions of various hinderances. The Empathy Gap one is really interesting to me too – the idea that we don’t know what “future us” wants. There’s a lot to unpack with that idea for sure. These are all amazing ones to be mindful of!
Thanks, Adam! When I look back now on certain situations, I can clearly see which behavior took place. Staying mindful of them in new situations should be very helpful.