Why Your Behaviour is Key to Personal Finance Success
Your personal finance success transcends income, and you can focus on spreadsheets and investment strategies, but your financial behaviour has a massive role to play. The habits you build around saving and spending can make or break your financial success, especially if you can't resist buying yourself a little treat. You can set yourself up for personal finance success, but if you don't get to grips with your behaviours, you'll never achieve your goals.
Why is personal finance dependent upon your behaviour?
Behavioural Economics and the Financial Psychology of Spending
Many people spend based on their emotions–treating themselves to a nice dinner after a rough day, buying cake for lunch because they're stressed out, or fuelling their stress with expensive alcohol and tobacco purchases. Emotional spending and impulse buying go hand in hand. When we're dealing with strong emotions, we are more likely to make impulse purchases that derail financial plans.
There is also a social pressure to keep up with your friends or family members. Marketing influences our behaviour, whether it's the best car, the nicest clothing brand, or a specific piece of tech that you just have to have. Many people will spend big so people think they're keeping up, even though it's detrimental to their finances.
Developing mindful spending habits is a must and getting control of your behaviour is the key to executing your financial plan successfully.
Saving Money: The Right Habits and Discipline
Developing a consistent savings plan is a must and it's something you should put in place regardless of income level. The best way to do this is by committing to save a specific percentage of every pay packet. Create an automatic payment to your savings account to ensure consistency.
You need a consistent savings routine and as important as short-term financial goals are, you also need long-term savings goals. What is the right savings cushion? What other options are there? Find an account that provides the maximum interest rates possible and compounding savings. You might want to speak to a financial advisor.
Debt Management
While taking a line of credit is an important part of building your credit score, you must avoid accumulating debt. If you can't afford to repay it quickly, you should avoid borrowing it. Taking out a credit card to make a large appliance purchase that you can pay off within the interest-free period is the ideal use. Taking out a car loan or a mortgage are examples of good credit. However, paying your bills and using your credit card to purchase groceries is a dangerous road to walk down.
If you have existing debt, a repayment strategy is a must. If there are several debts, you can pay the minimum for each but increase payments on one until it's paid off and shift your focus to another. You might want to speak to a financial advisor about taking out a loan to clear all the debt, consolidating it into one easy payment.
Ultimately, debt is a result of a need for instant gratification. You can't afford something you want, but you can have it with credit. Don't fall into that trap, it will only lead to stress and financial instability. Budgeting is key to debt avoidance.
Risk Tolerance and Investment Decisions
Investing is a good use of your money, but your emotions can influence your decisions. Whether your risk tolerance is weighted by fear or greed, those behavioural biases can influence your investment returns. Many people opt for a broker who can provide unbiased advice. This highlights the need for a balance of short and long-term investments, diversifying your portfolio to embrace some high-risk, short-term gains while making room for low-risk long-term gains.
Financial Planning: Goal Setting
Goal setting is a must when it comes to financial planning, and a spreadsheet is a good helper to keep track of your success. You want to save, but why? You know you should have three months' salary to fall back on in the case of job loss or injury. Beyond that, are you saving for retirement? Are you thinking about family holidays? Break it down and set clear timelines for every financial goal. Think big!
Ultimately, the key to success is breaking down those big life goals into more manageable steps.
Learning and Adapting
Your financial situation can change at any time, which is why it's so important to establish strong financial behaviour that will support you through even the leanest times. It will give you a healthy financial cushion to fall back on if your circumstances change or the economy runs into trouble and by dedicating a percentage of your salary to your savings, you're establishing a strong habit.
Consider enrolling in a Financial Planning Course that will strengthen your financial literacy and establish strong foundations for a strong savings plan and a clear guide to getting yourself out of debt.
Final Thoughts
Strong emotions influence your financial discipline and that can impact your financial well-being. By adopting a healthy money mindset and embracing strong savings habits, you can set yourself up for long-term financial success and avoid debt. You need to make conscious decisions around your finances to establish strong habits that will ensure your financial success. Fine-tune your behaviours – that's the key to everything.