Tap Into Your Own Psychology and Improve Financial Health

Those of us in the field of finance often find ourselves telling people what to do, rather than how to do it. We might tell you to save a certain amount of money, or to pay down debts using a certain formula. Concrete, clear instructions work for some people, but others need a different approach. You might be interested in a new field called Behavioral Finance, which teaches us how to take care of our financial health, instead of simply issuing orders.

If you want to improve your overall financial health and your approach to money matters, employ these strategies offered by behavioral economists.

Stop thinking in the short term. According to behavioral economy studies, most people have a hard time imagining themselves in the distant future. That’s probably why so many of us have a hard time preparing for that future! It may sound odd, but experts recommend looking at pictures of yourself that have been modified to make you look older. At the very least, try to picture it. You want to jolt your brain into realizing that the distant future is actually a reality, and then you will be less likely to procrastinate on retirement income planning.

Learn to overcome immediate gratification. You know that planning for the future is the right thing to do, but you may find yourself opting for immediate gratification most of the time. So instead of putting your tax refund in a retirement account, you blow it on a new TV. Later you might suffer regret, but then you make the same mistake again. In the future, plan such decisions in advance. When you make a commitment to yourself to save extra money in a particular account, you’re more likely to stick with the plan.
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Utilize your resistance to change. Something in human psychology makes us resist changes, even small ones. You can use this aspect of your psychology to fight your impulse to spend, by signing up for automatic contributions to your retirement account. You won’t be nearly as tempted to spend that money if it requires a call to the human resources department to opt out of an earlier decision.

Overcome your fear of loss. Due to the way our brains are wired, the fear of losing money is twice as motivating as the hope of gaining money. This means many people end up following an investing strategy that is too conservative, and which doesn’t allow for a healthy retirement fund. Keep in mind that you’re still working, and have time to make up for any losses. The possibility of insufficient savings once you reach retirement is actually the greater risk! We’re not saying you should pursue risky investments, but do confront your fears. Talk to your financial advisor about whether your current strategy allows for adequate growth of your assets.

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