About 7 minutes
 
 
Wait, isn’t this supposed to be about finance? So why are we talking about psychology? Well, we’re going to let you in on a little secret.
 
Being successful with your money really has a lot more to do with your behavior than with being a financial brainiac.
 
And that’s a good thing. It means that anyone can succeed financially, regardless of how you feel about working with numbers. But, that doesn’t mean it’s always easy. You’ll still need to understand the fundamentals and take the right actions, and changing our behavior can be hard.
 

Challenging your personal status quo

According to psychologists, we all have a natural tendency to keep doing what we’re doing. They call it a status quo bias.
 
If you’ve ever tried to break a long standing habit, you know exactly what it’s all about. It’s just difficult to change our ways, and our financial habits are certainly no exception.
 
But that’s why you’re here!
 
You’re ready to master your finances, or you’re at least curious about what else you could be doing with your money, which is great. You need to be motivated if you want to make progress.
 
And while none of this is about being perfect, you do need to make a commitment to yourself to improve. And now is the time to do it.
 
Also, if you’ve ever made any money mistakes in the past, that’s okay. We’ve all made mistakes, some minor, some not-so-minor. But that’s life. We learn from our mistakes and move on.
 
So now we’re moving on and looking to the future.
 
But before we get to the more detailed finance topics, we think it’s helpful to cover some important ways psychology impacts our finances and what you can do about it.
 

1) Don’t rely solely on willpower

We’re firm believers that anyone can achieve their financial goals. But we’re hesitant to suggest you can do so through willpower alone. It’s important to focus on specific actions and practical steps that will set you up for ongoing success.
 
One of the most effective strategies is to find ways to automate certain aspects of your finances, like taking advantage of direct deposit and making regular contributions to your investment accounts.
 
Automating your finances has two key benefits:
 
1) It reduces the impact your emotions and willpower have on your decisions
 
2) It frees up your valuable time so you can spend it on things other than your finances
 
This doesn’t mean you should blindly put your money on autopilot without monitoring what’s happening. But automation can help make your financial life substantially easier and more productive.
 

2) Know that many paths can lead to success

Are there any perfectionists in the house? You know who you are. You want everything to be just right. And you want to get the absolute best out of life, including your money. A noble endeavor indeed. However, it’s important to realize there are many paths you can take to financial success. There really is no such thing as a “perfect” financial plan.
 
It’s normal to feel cautious about making financial decisions though.
 
Regret and fear of regret are powerful forces, and can cause us to put off making even minor financial choices. Researchers conducting an experiment at an upscale grocery store showed that customers were actually more likely to come to a decision when presented with fewer choices rather than more.
 
As consumers, we’re often lead to believe that more choice is better. But unfortunately, too many choices can become overwhelming and confusing.
 
This is especially true when we’re presented with seemingly endless financial offerings. And this confusion can lead to inaction, and that’s not good.
 
The reality is, you can spend a lot of time trying to make a perfect financial plan, when having a sensible plan and getting started earlier will put you in a much better position than if you wait.
 
It’s also important to remember that your choices won’t be set in stone. You can always start with small steps and build up over time, but you do need to get started.
 

3) Be prepared for some uncertainty

Generally speaking, we like to feel in control of our lives and follow mental stories, or narratives. A leads to B, which leads to C, which then leads to D, and so on. Detailed explanations and perceived predictability give us a satisfying feeling of control.
 
Unfortunately, our financial lives don’t follow tidy and perfectly predictable paths.
 
When it comes to your finances, there will simply be some things you can’t control or predict perfectly, like how much money you’ll make over your lifetime, how much you’ll need in retirement, or how your investments will perform, just to name a few.
 
While this uncertainty can feel overwhelming, it doesn’t need to be. Make a reasonable effort to prepare for the future, build in a buffer, or margin of safety, when estimating your goals, and then try not to sweat every last detail. Otherwise, trying to predict your financial future with 100% accuracy can lead to trouble if and when you fall short.
 

4) Keep your confidence in check

Confidence is great. Without it, the world we be a pretty boring place. But that doesn’t mean you should be overconfident, especially if it leads to poor financial planning.
 
Although we’re here to help you make sense of your finances, we sadly can’t turn you into a financial superhero. You’ll need to understand your own limitations and appreciate the uncertainty of the financial world.
 
Day trading is a classic example of financial overconfidence gone awry. Day traders buy and sell stocks and other financial assets frequently, with the hope of “beating the market”. But more likely than not, you’ll actually end up with less money than if you simply left your investments alone. Not to mention you’ll spend a lot of your valuable time in the process.
 

5) Find ways to manage your stress

Unfortunately, stress has become a regular part of our day-to-day lives and can have a real impact on our mental and physical health. While some amount of stress can help us maintain focus and stay on track, too much can get overwhelming.
 
According to the American Psychological Association, financial concerns regularly make the list of major causes of stress in our lives. And that stress can derail your financial plans if not managed. Medical research has even shown a link between prolonged periods of stress and poor physical health.
 
This means it’s really important to take steps to keep your financial stress in check.
 
Create a plan, talk to people, write your worries down, take time to exercise, meditate, read, see a therapist; do whatever you have to do. If you’re struggling with your finances, stress will only make it worse.
 
When you make a financial plan, either on your own or with the help of someone else, you’ll create the necessary structure for making progress. As you do, hopefully your financial concerns will become more manageable. They’ll probably never disappear, and some amount of financial stress will actually help you maintain good habits. You just don’t want stress to paralyze your progress.
 
Always remember, tomorrow is another day. We can’t stress this enough..
 

6) Practice impulse control

Patience is essential to growing your wealth. It will take time, and you’ll need to stick with your plan if you want to see progress on your finances. And this means you’ll have to manage your short term impulses.
 
There are a lot of ways impulsive actions can hurt your finances. But two important ones to consider are impulse purchases and impulse investment decisions.
 

Manage your impulse purchases

Impulse purchases can take a bite out of your finances, whether you’re at the store or shopping online. Stores strategically stock their checkout lines with impulse items and the internet is constantly recommending products we might like, all with the hope of encouraging a snap decision to buy. So it’s important to build your defenses. Force yourself to actually think if you need something before buying it. Maybe set a rule to wait 24 hours and see if you still want to make the purchase before making it. Or write down your reasons for buying it.
 

Avoid making impulsive investment decisions

It’s also important to find ways to control your impulses when it comes to investing. Seeing your investments take a nose dive can, and probably will, make you feel pretty anxious. But you generally don’t want to let emotional reactions influence your investing habits. Create a long-term plan and then stick with it.
 

7) Always think for yourself

When it comes down to it, if you want to make the most of your finances, there’s one key rule to follow – think for yourself. Don’t just follow the trend or blindly do what others say, even what we say.
 
You need to be your own best advocate when it comes to making a better financial future.
 
It’s also important to give yourself every advantage possible by removing barriers to smart financial choices and automating your finances when appropriate. We have enough challenges in life, so why not make saving money and building wealth as easy as possible.
 

Want to learn more? We’ve only scratched the surface of the psychological side of money. So if you’re interested in learning more, we suggest starting with the works of Daniel Kahneman, Amos Tversky, and Richard Thaler, three pioneers in the field of behavioral economics. And there are a lot of other greats too. So do some exploring!

Key Take-Aways

1) We naturally tend to keep doing what we’re doing, so you’ll need to commit to change, and automating your finances can help turn intention into action.

2) It can be better to get started with a reasonable financial plan than to aim for perfection and delay.

3) You’ll need to be comfortable with some amount of uncertainty. You can’t predict the future perfectly, so don’t let overconfidence fool you into thinking you can.

4) Money stress is real and needs to controlled. Don’t let it interfere with your progress.

5) Keep your impulses in check. Create a plan and stick with it.