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 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 efficiency lies within us. While it may not be easy, we do indeed possess the capacity 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 attaining 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 the attainment of $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. I grew up in the 70’s and 80’s in a blue-collar town. My childhood, full of turbulence. A family, broken and poor. (But always the love and strength of one amazing mom. Hi, momma!)
During childhood and into adulthood, I developed and acted on a warped sense of love, success, and money. In my twisted thinking, I could never have enough of each.
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 is 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 Hinder 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 the 2015 paper, 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.”
Additionally, the authors, Nathalie Spencer, Dr. Jeroen Nieboer, and Antony Elliott OBE, FCIB, surmised “that poor financial capability is not simply a problem of lack of information.” Thus, 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
From Talking the Talk to Walking the Walk
Going from what makes financial sense to actually practicing the advice does take some effort, as most good things in life do.
Educating ourselves on financial topics and facing what we know about how these six behaviors hinder money management success, we can learn to manage them instead of fighting against them.
Spencer, Nieboer, and Elliott 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 portfolio
- Classifying purchases into ‘wants’ and ‘needs’
- Pay 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 that don’t add 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 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.