When it comes to personal finance, most people tend to think that it’s all about managing the numbers. Well, it is way more than that.
For instance, have you ever paused to think about how your behavior affects your finances? There is a high possibility you haven’t.
The truth is personal finance is a crucial facet of our lives that we cannot ignore. It usually involves budgeting, investing, and everything else about money management. But the big question is, why is personal finance dependent upon your behavior?
It’s simple. How you manage your money, invest, save, or budget is linked to your behavior. As such, your behavior determines whether you have bad or good financial health.
Let’s dig deeper to find out how;
What Is Personal Finance Behavior?
Your guess is right! It simply means your attitudes, values, and beliefs towards finances. In other words, personal finance behavior is how you relate to your finances.
For instance, it involves your actions or decisions regarding budgeting, investing, spending, borrowing, and more. Every decision you make determines the direction your financial future will take. So, be careful and think everything through before making any financial decision.
Generally, every person makes different financial decisions. This means that personal finance behavior varies for different persons. This is because different people have different upbringings and personality traits and are exposed to different cultures, economic conditions, and financial education levels.
So, today, we look at how various factors affect a person’s behavior, in return, altering their personal finance decisions.
Psychology of Money Lessons: Upbringing and Culture
The psychology of money, or how we think about money, is a huge factor in how we relate to money and the financial decisions we make. This usually comes about due to your upbringing or culture.
Take a person with a scarcity mindset. Since they are used to scarcity,, they are prone to save money for a bad day, avoiding spending or even investing.
On the other hand, people with abundance mindsets tend to invest and risk more, which might, in return, bring higher returns or losses. These two mindsets bring forth different personal finance behaviors.
Emotions can also have a significant impact on your financial decisions. For example, anxious or stressed people are more likely to indulge in impulse buying or overspending while trying to cope with their emotions.
Happy people tend to make rational financial decisions as their emotions are calm and composed. It is, therefore, quite crucial to understand how the psychology of money affects your financial decisions.
How Personal Traits Influence Personal Finance
Every person is unique in terms of personality traits. These differences greatly affect our financial decisions. For example, naturally impulsive people are more likely to buy impulsively than others. On the contrary, risk-averse people avoid spending unless it’s on essentials. They also avoid taking debts and sometimes investing.
Other personality traits like consciousness and self-control are associated with better financial decisions and outcomes. In fact, such people set clear and achievable goals, which lead to better results.
The good thing is that good personality traits can be learned. This way, even if you have poor financial choices, you can replace them with better ones if you practice.
How Behavioral Biases Affect Personal Finances
Behavioral biases are beliefs ingrained in our personalities that affect our behavior. These biases are mostly psychological and affect how we do things, including how we make financial decisions. So, if you are wondering why personal finance is dependent upon your behavior, this is another reason why.
Confirmation bias is a good example of such behavioral biases. This is a behavior where people look for information that confirms what they believe and ignore what contradicts it. Let’s say you believe that cryptocurrency is a scam, you tend to look for information that affirms that. This means that the likelihood of investing in crypto is minimal.
Other people are loss-averse. This means that instead of researching how a certain decision can bring returns, you concentrate more on how to avoid losses. This might discourage you from investing or taking a certain financial step.
In such cases, someone should try to make decisions on thorough research and not their pre-existing beliefs.
How to Change Your Personal Finance Behavior
It is true that our behavior affects our personal finances. As such, if we want to better our finances, we must replace our negative behaviors with positive ones. Here are some great strategies to do just that:
1. Setting Personal Financial Goals
You can never grow if you don’t have goals. How will you know what you intend to achieve?
So, the first thing you do to change your personal finance behavior is to have some financial goals. Set specific and attainable financial goals. These will give you a clear focus on what your target is and how you intend to achieve it.
With clear goals, you can easily use the resources at your disposal to attain results. Also, they keep you focused and committed. You’ll also avoid getting derailed as you have prioritized your goals.
2. Creating a Budget
Having a budget is as crucial as setting those financial goals. So, after you know what you want to achieve, determine how much it will cost you to do it.
With a budget, you’ll know how much you have, how much your target is, and how you can get more money if needed. This way, you are never caught off-guard in the middle for lack of cash.
A budget also helps you to avoid overspending or spending on unnecessary areas. It helps you to focus your resources on what must be done.
And if you find budgeting too tasking, you can leverage the power of personal finance budgeting apps. These apps greatly simplify the entire budgeting process for you. For instance, you can try YNAB or Opturn.
3. Learning How to Save
Saving is not easy. So many people will tell you this. However, if you want to improve your personal finance behavior, you must have a saving plan.
First, you must know that things happen, and if you are not prepared, you might end up ruining your finances. So, for starters, have an emergency fund. This should cater to unexpected expenses that may arise or even for huge purchases and vacations.
With a savings plan, you’ll avoid getting into debt when unexpected expenses hit your door. You can consider automatic contributions to savings accounts to ensure that you never forget.
