The Psychology of Financial Habits
Why is it So Hard to Change Financial Habits?
Have you ever felt like you need to learn and relearn something before you can really understand a concept? How many times do we listen to a lecture before we really change our behavior? According to The Safety Net study by Empower, 1 in 3 individuals have no emergency savings fund, and 29% say they can’t afford an unexpected expense over $400. Why is saving money so difficult for so many people? Access to financial literacy might not be the only thing we need in order to change our behavior.
Acknowledge Your Past
According to research, money decisions are not only based on our ability to do math. Rather, it seems that our past experiences, our emotions, and our inability to see our future are big influences on how we see and spend our money in the present. So, how can we change this? Acknowledge your past experiences. According to Morgan Housel, in his book The Psychology of Money, two individuals with identical financial knowledge can behave very differently based on their past experiences. We are all influenced by the way we were raised and by the economic stability of the place where we were born. These past experiences can shape the way we see money and our relationship with it - they help influence our decisions and drive our behaviors. Can you recall your first experience with money? What was the economy like where you were raised? What were your parents' attitudes toward money? Acknowledging our money beliefs or “money scripts” can help us take the appropriate steps to move beyond attitudes or beliefs that could be hanging up our financial progress.
Evaluate your emotions
Since our emotions have such a big impact on our financial decisions, understanding what emotions we experience as we spend money can be another great place to start. Here are some practical tips for analyzing emotions around expenses:
● As you review your budget, you can assign to each category a number according
to how important that category is for you and how willing and able you are to
reduce spending in that category.
● Next, review your bank statements and review expenses from the categories with
the higher scores. Do you regret any of your purchases?
● If yes, think about what feelings, thoughts or circumstances led to that purchase?
● Try to identify a cheaper (or free) way to meet that need in a way that wouldn’t
lead to a regret in the future.
Analyzing our past behavior and the emotions behind them might not fix everything, but it is a great starting point.
Envision your future
As behavioral economist Daniel Goldstein explained, we struggle between short-term temptations and long-term goals. It is very hard to envision our future self and see our future needs, but it is very easy to feel what can bring us gratification right now. For some people, picturing a future goal, like a vacation or graduation, can be very helpful. Additionally, using tools like saving calculators can help us estimate the savings needed for a future expense and can help us see our goals as achievable. If we want to make sure that our savings goals are not hijacked by our emotions, we can set up automatic transfers as soon as we get paid. There are a lot of things that influence the way we use our money, our emotions, our past experiences and our inability to really see the future are only a few of them. However, with the proper tools and help, we can improve to have a better relationship with our finances and be more prepared for the future. If you ever want more help or guidance in this area, the Financial Wellness Center is a great resource for you!
Key Takeaways:
- The Financial Wellness Center offers financial counseling resources to help you reach your goals
- Our past experiences shape the way that we see and interact with money
- Emotions can influence the way that we save and spend our money
- Our financial future can be difficult to picture and understand
- Review your spending and decide how it aligns with your goals or supports your needs