Financial change is challenging but repeating the same old money choices is even worse. Now more than ever, it is important to make better money decisions.
Our relationship with money is full of habitual emotional patterns which tends to make our resistance to change even stronger. Even our best intentions to put the brakes on spending or get started investing can be derailed by old routines, habits, and beliefs.
The bottom line is, if you want to see different results, you have to take different actions. It’s hard I know, but we just can’t make it happen any other way.
Here are a few mindsets and money habits you’ll need to change if you want to see better financial outcomes and make better money decisions. For my business owners, you can even try these in your business.
Sticking your head in the sand about your money decisions
We’re humans, we all have a tendency to avoid time-consuming, confusing, or emotionally painful situations. We distract ourselves with the fun, easy stuff. It sure seems easier to ignore problems than deal with them….but that approach has a nasty way of catching up with you.
Especially when it comes to money.
Nothing will change for the better if you continue to procrastinate on doing the numbers and getting real about your financial situation.
What to do differently
Let’s break it down into baby steps and avoid thinking that change has to start with a big step.
Instead of thinking about Every Single Thing you need to figure out, start with the simplest action first.
This might be collecting all your credit card statements together. The next step is adding them up to see what you owe. Then the next, doing the research to figure out which one to pay off first. You don’t need to do these all at once, break them up over the course of a week or month.
It might not seem like it, but this is massive progress!
Taking a small action can set in motion the momentum to accomplish the bigger financial task step by step.
Shying away from risk
Loss aversion is a cognitive bias. That’s just a fancy way of saying we overstate problems.
We have a tendency to feel a loss on a much bigger scale than a gain of the same magnitude.
Even though we might celebrate and acknowledge when good things happen, it’s the stuff that goes wrong that really sticks with us. Why do you think the media operate the way they do?
When it comes to money, loss aversion can have a big impact on our financial goals as we shy away from taking any risks. If you’re an investor, loss aversion bias can make you stagnant and resist bringing change into your portfolio for fear of what you might lose.
Or, shying away from risk might be the thing holding you back from getting started or continuing with investing in the first place. If you can tackle loss aversion, you will be able to make better money decisions.
What to do differently
The first thing I want to give you permission to do is to make mistakes. When it comes to investing there are going to be mistakes or losses, it’s a natural process.
As long as you manage these losses and have a good understanding of risk, then you can overcome this fear.
The next thing to appreciate about risk is that risk is what determines your returns. If there are no risks, there are no returns. Simple, right?
It is risk in any transaction that generates the benefits. So once you accept that risk is your friend, provided you have a good risk management plan, then you can move past the fear and appreciate that returns will flow based on the level of risk you take. Without being silly, of course.
For example, putting cash in the bank at the moment might earn you about 3% per annum. That is simply because there is not much risk in putting your money into a bank account. The chances of your money being lost are minimal, so the return is minimal.
On the other hand, the stock market and property market, over time will provide higher returns because of the risk of loss. Much more like 10-15% per annum.
So once you accept risk, when managed, is your friend, you can move past this fear and take the necessary actions to start investing.
Constantly overspending on credit
Emotional forces are at play when we spend with credit, which can make the overspending habit a hard one to crack.
Credit anaesthetises, another fancy word, is the ‘pain of paying’. A credit card’s psychological power is that it separates the pain of paying from the pleasure of buying.
Paying with cash is more painful than paying with credit cards. When we charge the card we get a little high at the moment without the pain. It comes later though….in the form of a credit card statement you’re too scared to read.
What to do differently
Take drastic action and cut the cards up right now.
Keeping your cards locked away is the second option. It takes away the temptation of impulse spending. Remove them from your wallet and stash them somewhere difficult to access. Some people put a literal freeze on their credit spending, freezing their card inside a ziplock bag in an ice cube! It’s true!
Using your own money and not someone else’s all the time is the next key to better money decisions.
The way you talk about money
Developing new money habits for new results can take time but there’s something you can change immediately that will make a difference. The way you talk about money.
Our mindset can play a bigger role in our financial lives than even our income. We need to speak in a different, more positive way about money to see real change.
Constantly saying things like “I’m so broke” or “We can’t afford this” or “Saving money is SO hard” isn’t helping change your results. While those things may be true in your current situation, this kind of negative narrative could be a big reason why you’re staying stuck financially.
In fact, what you project is what you receive more of. So speaking of lack or struggle tends to result in more lack and struggle. Crazy right?
What to do differently
As soon as you feel a negative comment (or even thought!) about money coming on, stop yourself. Replace it with something positive like “I’m glad I’ve started making progress getting my finances sorted” or “We’ll be able to afford that soon enough” or a grateful thought in general. We all have something to be grateful for!
A simple and effective better money decision is to change the money dialogue, both in your mind and what comes out of your mouth.
Spending every cent of a windfall
It’s a nice feeling when a little extra money you weren’t expecting comes your way. An extra large tax return, unexpected work bonus, inheritance or even $50 your parents slipped into a birthday card.
These are windfalls. According to science, windfall gains are spent more readily than other types of assets. You weren’t expecting it right, so why not splash out and treat yourself?
Change what you do with these windfalls, big or small, and you’ll get a lot more bang for your buck than spending it all.
What to do differently
I’m not saying never treat yourself to something if extra cash finds its way to you. Just don’t blow the whole lot!
Spend a third of your bonus and save the rest. For those small cash amounts, that birthday money, or the forgotten $20 you found in your wallet, save it somewhere. When it hits $100, invest it.
If you really want to spend that tax return, put the money in the bank for three months, then decide whether to spend, save or invest it. The cooling-off period curbs impulse spending regrets.
For those big, once-in-a-lifetime windfalls, be sure to seek professional advice. The statistics are against you, 75% of lottery winners are worse off 5 years after the win than they were before winning the prize.
Conclusion
Making better money decisions doesn’t have to be difficult. Just apply these 5 tips and see how much of a difference it has to your results.
The simple facts are that making better money decisions starts with the small stuff and evolves into the big stuff, so getting it right with the small stuff makes it easier when the big decisions come along.
What financial change are you struggling to make right now and why? Let me know in the comments how you are going to make better money decisions.
If there was one thing I could change in people who come into my community, it would be their money talk. It is the single most powerful way to change your money outcomes. To recognise this and be able to assist your kids with your new insight is a great outcome. Well done for recognising the change and for implementing. it isn’t easy, but it works. Cheers
Great article Andrew,
The way I talk and think about money is what I need to change. I, like a lot of people get our money knowledge from our parents, and both my parents were always a bit on the negative side or that’s what it seemed, they always seemed to struggle.
Money seems to be a taboo subject, So the way I talk about money doesn’t just affect me it also affects my children, it forms there opinions on the subject.
thank you for making me think about money in a different way and how I portray money to my children.
Thanks again
Dave