Use Behavioral Finance to Build Wealth
Guest Contributor, Alexandra of Real Simple Finances.com
When you spend money on things that you don’t need, you are stealing from yourself.
This may seem like obvious advice to some, but if we take a quick look at the consumer-driven society we live in, it is clear that this is exactly what all the stores want us to do: we have opportunities to open credit cards at every major clothing store (which doesn’t help you make the most of your credit cards!); we are pressured to buy the newest electronics whenever a slight upgrade is made; we even go to restaurants where employees are in competition with each other to push specific menu products.
Upgrading to onion rings for .99 cents probably won’t break your budget, since it is possible to live well and spend little, but when you consistently make it a point to purchase things you don’t truly need, you end up taking more important things away from yourself.
You steal your finances.
Use Behavioral Finance to Stop Stealing
This is the most obvious way you are stealing from yourself when you make unnecessary purchases. Unless you have free reign to spend as you please (hint: if you have debt, you probably do not have this freedom! I sure don’t), you are taking away money that could be put toward financial freedom.
Even if you don’t have any debt, it is important to analyze the purchase you are making and compare it to your ultimate financial goals. In this case, you want to be particularly careful with larger purchases, such as TVs, new vehicles, a gaming system update right after it has been released, and so on. These purchases, which can cost anywhere from one week’s pay to a year’s salary, can seriously injure your financial stability.
Small purchases – a pair of designer jeans, a coffee, or the same style boot in two different colors – do add up, but since you are reading this blog I imagine that you are already conscious of your daily spending. Many of us have already limited or omitted our daily $5 premium lattes, and make relatively smart purchasing decisions on a daily basis. The problems we encounter come up when clothing stores offer coupons (“if you spent another $40, you get $10 off!”), or try to pressure you into credit cards to save 10% on your initial purchase. Evaluating whether or not these deals are actually financially sound can help you avoid stealing from your own wallet.
You steal your happiness.
I am not happy when I feel broke. I am not happy when I have more things to organize, clean, or put away. After all, well-organized crap is still crap! Adding more things to your home can lead to disorder, if not outright chaos at times.
Seasonal decorations, for example, are wonderful because they keep your house looking fresh, and make you feel festive during specific holidays. However, holiday-specific decorations also need to be stored after their time is up. If you do not have a clear filing system (read: part of your home dedicated only to storing things you use once per year, hence taking away from living space), you may end up spending more money on decorations because you will lose or forget things each season. Eventually, this leads to stress and irritation.
Overfilling your closet can cause stress, too, as can filling your garage with tools you rarely need, or your office with books you won’t read (guilty!). Essentially, when you fill your life with stuff that you buy solely because you believe it will make you happy, the opposite usually occurs.
To solve this problem, limit yourself: do not buy more seasonal items than you need; ask yourself if your entire house needs to be decorated for minor holidays such as Valentine’s Day, or if you really need the same dress in three colors; and choose items that make you happy all year.
You steal your time.
Use Behavioral Finance to Stop Stealing From Yourself
How many hours of working will it take you to pay for that new car? What about that new TV? If you take home $500 per week, that new 60 inch flat screen might take you three 40-hour weeks to pay off. Is it really worth 120 hours of your time? Deciding how many hours you will spend working for anything you purchase will be a terrifying yet effective method for controlling unnecessary spending. You can make this easier on yourself by creating a budget and allocate some of your funds for unnecessary spending.
Are you stealing from yourself? What action steps will you take today to police your spending habits?
Behavioral finance helps you to understand how your mind impacts your wallet.
Follow these simple tips and use behavioral finance to your advantage:
1. Richard Thaler and Carl Sustein, authors of Nudge suggest setting up decisions so the “right” one is easy to implement. Businesses do this by automatically signing up workers for the company 401(k) plan. Another way to use behavioral finance to your benefit is by setting your credit card to automatically pay the entire bill every month.
2. Make smart spending rules for yourself. For example, designate “no spending” days. When you or the kids have earned a reward, visit the dollar store. Designate a 2 week waiting period before making any big purchases. Only order water when eating out.
3. Create financial goals, write them down, and monitor their progress. For example, get a raise by doing extra at work. Map out a strategy to outperform at your job. To Boost wealth it’s best to combine earning more with spending less.
A combination of earning more, spending less, and paying off debt with small steps can lead to great rewards. Use your mind in the right way to increase wealth.
Bio: Alexandra posts easy, real-life financial tips at Real Simple Finances. In her spare time, which doesn’t exist during the school year, she rescues dogs and reads Virginia Woolf.