Proper financial management is a major lifestyle goal that we all strive to achieve. But however hard one may try to get there; it is only human nature that you may fall short once or twice. After all, you know what they say about the best-laid plans.
Part of the reason why you may face financial pitfalls is your psyche. Maybe you’re all fired up when you make a budget but find it difficult to stick to it when the time comes for it, or maybe you diligently save money all month only to blow it all on a “reward” at the end of the month. These well-intentioned habits can end up achieving the exact opposite results of what you may have wanted to see.
Here are 5 psychological habits that are financially destructive, and how you can overcome them:
Relying on Willpower Alone
Everyone wants to be good at money management, but setting out to become financially savvy just through sheer willpower is not just silly, but it is also damaging.
“Motivation, like anything else, ebbs and flows,” says Mariel Beasly, co-founder of Common Cents Lab, “So, if you’re relying on sheer willpower to prevent you from making purchases, it’s going to wear down over time and won’t always be effective.”
That’s not to say that you can do it without motivation, but that you need to put systems in place that will keep you from straying on those days that your willpower seems to be weakening. For instance, one of the best and most common ways to control your finances is to create a budget. Well, it’s one thing to make a budget and it’s another to stick to it – especially long term.
There are things you can further do to make sure that you do not end up overspending. The first thing to do is to set up automatic payments for things such as rent, electricity, water, etc. This way, the most essential expenses are paid off without you having to do it manually. You can also set up automated savings so that a chunk of money is removed from the main account before you have a chance to spend it.
It’s also important to avoid creating a budget that is too restrictive because that can be a major trigger that causes you to overspend. And make sure to allocate some money for the things you love to do, whether it be eating out splurging on clothes once in a while. Basically, don’t put too much pressure on your willpower that it ends up breaking!
Seeking Immediate Satisfaction
Humans are inherently impatient, which is what makes it so difficult to focus on the future instead of seeking gratification in the now. After all, doesn’t it sound more fun to splurge on trips to the mall now rather than save up for a proper vacation a little bit later?
Carla Marie Manly, a psychologist based out of Santa Rosa, California, says that there is a term to describe just behavior – “delayed reward discounting”. This basically means the preference of smaller, immediate rewards than waiting for a bigger delayed one.
Unfortunately, as she explains, the lack of control over such impulses can actually lead to overspending. Even though these impulse purchases may seem smaller than the delayed purchase, you end up making many of them, ultimately leading to a larger expense overall.
“Those who are impulsive and do not pause to wait for rewards in the future ― which may be obtained without such penalties as an overdrawn account or credit card interest ― get drawn into an unfortunate and costly cycle of overspending,” explains Manly.
Considering Credit Cards as “Free Money”
Nothing in this world is free, least of all money! If it was at all practical, I would recommend not getting a credit card at all because why bring the temptation upon yourself in the first place. However, since credit cards are an important aspect of garnering a good credit score, it’s better to have them but use them cautiously.
The most important rule of spending, whether you have a credit card or not, is to never spend beyond your means. If you know you cannot afford it, a credit card isn’t some magic spell that can change that. Always live within your means and never forget that the lenders are going to come knocking on your door at the end of the month!
Following the Crowd
The people you surround yourself with can have a serious impact on your finances because you see what they buy and either want that for yourself or think that of it as necessary. For instance, according to the Federal Reserve Bank of Philadelphia, people are more likely to file for bankruptcy if their neighbor has won the lottery because they see them buying nicer things and end up doing the same.
“We take cues on what we should be doing from those around us,” Beasley says. “Financially, we are motivated by what we see others doing, which includes their spending habits.”
This is called visibility consumption, and it can have a major impact on how much you spend. It’s very easy to see what car your friends drive, how big your neighbor’s house is, what clothes your co-worker wears, etc., and it’s only human nature to want the same for yourself. On the contrary, you don’t see how much each of them earns, if they are in debt, if they have a fully-funded emergency account, or if they’ve saved anything for retirement. Since these habits are not as visible, you aren’t as influenced by them.
Not Considering the Bigger Picture
You Only Live Once! This is a saying that people often use before doing something impulsive, stupid, or dangerous. While it’s true that you don’t know what tomorrow may hold, and we’re not asking you to suffer today so you’ll be better off in the future, won’t you breathe easier now knowing that your future is financially stable?
“We’re more focused on the here and now rather than the financial benefits that can be realized far off into the future,” Beasley explains. “We’re already naturally inclined to do what feels good in the present. This is because the current cost of delaying gratification is sometimes painful, and that’s not very motivating from a behavioral perspective. As a result, we just make decisions that feel good in the present.”
It can be the same when it comes to investment. Lots of people feel discouraged by it because it can take a long time to make actual money from it. However, if you do not find ways to save for retirement or invest in avenues that’ll help you earn passive income, chances are pretty good that you’ll end up having to work until the day you die.