Economists have long been aware that different people behave differently under the same set of financial conditions. For economists, things would be much simpler if they did. They used to; however, attribute these discrepancies to contrasting values. The underlying presumption was that people would act “rationally” but that everyone would choose actions consistent with their principles that were most likely to serve their interests. Experimental economists and behavioral finance scholars look at why they don’t.
Having a healthy perspective on money can improve our financial situation. Even a brief shift in perspective can help us feel more in control of our money, save more, and budget more effectively.
stress over money rules Americans’ financial mindsets, with 77 percent of respondents saying they worry about their financial condition and 58 percent saying money has a controlling influence over their lives. According to the study, people who are under stress perform worse when it comes to saving and budgeting, feel less in control, are more impulsive with their spending, and are less likely to believe that hard effort is the key to success. It’s interesting to note that this effect persisted even after adjusting for income and credit ratings, indicating that it is probably more of a mentality effect than a result of one’s financial situation.
The study then asked participants to do a brief mindset-shifting exercise to explore if the effects of stress may be mitigated. It was discovered that considering long-term objectives for even a brief period of time might counteract these impacts, making people better at saving and budgeting and more assured in their ability to manage their finances. Therefore, “”bigger-picture,”” abstract thought patterns can result in better financial actions. This advice came from The Decision Lab to assist people in maintaining motivation while keeping their eyes on the prize.
Practice These Tips to Develop a Smarter Money Mindset
1. Make important decisions under low stress
Try scheduling the decision at a time when you’re naturally calmer and have the cognitive capacity to contemplate the long-term impact of your choices the next time you have to make a financial decision, such as pondering a move or making travel plans. Although you can choose to delay making a decision until a time when you’re less worried, you can’t choose to be less stressed right now.
2. Focus on values over features
One of our research’s most intriguing conclusions is that abstract thought improves our ability to manage money. Regrettably, we can easily become mired in the intricacies of our daily lives. We lose track of how the items compare to our key beliefs and aims, for instance, when we start comparing them against one another. The next time you find yourself evaluating an entire aisle of various TVs or coffee makers, you can stop and think, “”How will this purchase affect my long-term goals? Does it align with my goals in life?
4. Don’t punish yourself for the past—be kind to yourself when reviewing purchases
Stress might cause us to base our decisions on what is most pleasurable at the time. In other circumstances, these choices can cause remorse, which can increase stress levels further, and so on, creating a vicious cycle. The next time you reflect on prior purchases and there is one you are not satisfied with, you can try to accept it, admit that it was a mistake, and come up with a strategy to prevent it from happening again. Try not to worry too much, though, as this can actually make you less likely to do better.
5. Use the good times to shift your habits to support your mindset change
According to research, stress makes people more likely to act in automatic rather than conscious ways. But while stress can’t always be avoided, developing healthy behaviors now can help keep us safe later on. When you’re at ease, take a close look at your habits. Consider in particular which healthy behaviors will most likely influence your behavior if you experience stress again.
6. Focus on what you can control instead of what you can’t
Although the financial conditions cannot be changed right away, you can alter your perspective in order to make better financial judgments. Try not to dwell on what you wish you had the next time you have to make a financial decision; instead, try to concentrate on what is under your control and what you can influence.
8. Keep your goals in front of you
Putting goals front and center may combat present bias by being forced to think about how each choice will affect your financial objectives. For instance, could write down your goals on a piece of paper and place it by your door or bed, or you could make it your phone’s screensaver. These simple reminders will help you keep your goals in mind at all times, especially while making financial decisions.
Anyone who views money as a means of securing pleasure, love, or defining their self-worth should read Mind Over Money.
The best resource for understanding the psychology of personal finance is Mind Over Money, which explains how your views about money developed when you were a young child and what you can do to turn your brain into a financial ally rather than an adversary.