The credit card bill you’ve been struggling to pay off?
The dream home you’ve been steadily saving up to buy over the past few years?
For me, it’s the vacation I’m taking in two weeks to celebrate my 30th!
Whatever string of financial stressors or milestones (probably both) pass through your consciousness when you think “money”, I’m betting there’s something else that comes up with those thoughts – feelings.
Whether it’s anxiety, nervousness, excitement or the occasionally nauseating cocktail of all the aforementioned, money is intensely emotional.
And yet, many of us still try to approach our finances in a strictly analytical way – beating ourselves up when budgeting efforts fail and savings attempts fall short.
While distilling financial realities and desired outcomes down to numbers is an essential first step – implementing habits and behaviors to support those desired outcomes requires looking at what else comes into play in shaping our financial lives – thoughts, feelings and all the irrationalities that make us human.
So today I want to talk about 5 money mindsets that get in the way of savvy financial choices, what you can do to combat them and how you might even flip them to work in your favor.
Inertia refers to our tendency to maintain the status quo, keeping things as they are instead of actively making a change.
Change requires thinking, decision-making and action – all of which make it far more difficult (and often more unpleasant) than leaving things as they are. It’s the reason habits are so hard to break – bad financial habits being no exception.
Marketers understand inertia and use it to their advantage (and often, to our detriment).
The new gym or food subscription service offering a free introductory month for example, knows that putting the onus on you to cancel after 30 days makes it much more likely that you’ll succumb to inertia, do nothing and wind up paying for the service, whether you use it or not.
Scheduled money check-ins and goal setting can certainly help generate some of the necessary disruption to combat inertia, but the most powerful way to fight inertia is to use it to your advantage.
Remember, inertia is all about resorting to your default behavior, so make that default behavior financially beneficial.
The more you automate financially savvy behaviors like setting aside a percentage of your paycheck in savings or contributing $X per month to your retirement accounts, the more inertia will serve you.
By automating these good financial practices, you no longer have to opt-in to fiscally responsible habits, they’re your default. And because we’re all more likely to succumb to our respective defaults, you’re automatically set up for success.
Related Reading: How to Combat Financial Procrastination
Scarcity, or the belief that you don’t have enough, can induce a kind of all-consuming stress and anxiety that hampers your ability to focus on and work towards long-term financial goals.
“Scarcity narrows your focus to your immediate lack, to the meeting that’s starting in five minutes or the bills that need to be paid tomorrow. The long-term perspective goes out the window,” writes Rutger Bregman.
In other words, when operating under a scarcity mentality your mental bandwidth is so consumed by your immediate needs that long-term plans fall by the wayside.
Note that it’s the mindset of scarcity that results in poor long-term decision-making. So even if you’re not living in actual poverty, daily anxiety surrounding common financial stressors like debt pay off or near-term savings goals, may be contributing to a scarcity mindset that affects your ability to make smart financial decisions.
And just how much of an impact does a scarcity mindset make? According to Princeton psychologist, Eldar Shafir, “Our effects correspond to between 13 and 14 IQ points […]. That’s comparable to losing a night’s sleep or the effects of alcoholism.”
That’s some major impairment.
We know we can’t trust ourselves to safely drive when drunk, so how do we expect ourselves to manage major financial choices that impact the trajectory of our lives in the same impaired state of mind?
To push back against the belief that you don’t have or will never have enough, start fostering the belief that you do or will have enough.
As my friend Bridget over Money After Graduation writes in her fabulous post on scarcity, “An abundance mindset is really about trusting that, if you are taking the right steps — working to earn money, sticking to a budget, repaying your debt, and saving for the future — you will be ok. There’s a 100% chance that if you’re focusing solely on what you don’t have, you’re failing to acknowledge how much you do.”
In my efforts to overcome my own scarcity mindset, I started a journal of gratitude – writing down three things each day for which I was grateful.
By taking my mental energy previously reserved for financial anxiety and channeling it into gratitude for what I already had, and productive action to achieve more of the same, my financial life was transformed.
Loss aversion refers to our natural tendency to work harder to avoid a loss than we do to enjoy a gain.
It’s why people hate budgeting, because they think about it within context of loss, what they have to cut back, rather than a tool for creating a spending plan built around their core values.
Instead of thinking about financial planning within the context of sacrifice, try building your budget from nothing. Starting from zero and building up, rather than from some hyper-consumer driven vision of the status quo and cutting back.
When you build from a place of nothing, everything is a bonus. When you budget from excess, everything is a sacrifice.
Practicing gratitude for what you already have is also a powerful tool in avoiding loss aversion.
By shifting your focus from what you don’t have to what you do, you’re more likely to find satisfaction in a lifestyle that falls within your means.
Because loss aversion is such a powerful force, I try to manipulate it to my advantage. How? Hyper-specific goal setting.
I not only set goals, I visualize them in great detail, imagining where I’ll be, who I’ll be with and how I’ll feel when achieving them.
By getting viscerally connected to my goals, the prospect of failing to achieve them becomes more painful.
Remember, we’re more motivated by potential losses than we are by potential gains, so when you’re goal setting for your dream life, remember it’s also your dream life that’s at stake if you don’t follow through.
The more connected you get to those goals, the more you raise the stakes of loss and the more likely you are to follow through.
Loss aversion doesn’t just play out in financial goal setting and budgeting, it’s also a major player in investment decisions.
The tendency to want to sell off stocks when their value is dropping, even if they’re a good long-term investment, is triggered by loss aversion. To succeed as a long-term investor, you have to fight against this natural tendency.
Personally, I use a set it and forget it strategy, parking my money in a few low-cost index funds and letting it grow for the long-haul, tuning out the noise of the daily ups and downs of the market so I don’t fall prey to making poor short-term investment decisions motivated by loss aversion.
Anchoring is the tendency to rely on one piece of information (often the first piece of information acquired on a particular subject) when making decisions about that subject.
Classic retail devices like BOGO – buy-one-get-one-half-off – and big price reduction signs displaying original prices crossed out next to lower sale prices are great examples of anchoring in action. In these instances, retailers are using anchoring to manipulate you into spending more by making the second item or the current price seem like a must-have deal, whether your really want the item or not.
Anchoring also impacts our expectations. When you anchor into arbitrary norms, like spending three months’ salary on an engagement ring, it’s easy to make terrible financial choices, like financing a ring you can’t afford or failing to pay off student loans to save up for a ring (which, by the way your partner will wind up on the hook for as soon as you get married)!
To combat anchoring, consider opportunity cost. In other words, what could the amount of money your considering spending afford you otherwise, and is that trade off worthwhile?
In the case of the engagement ring, how much of your student loan could you pay off if in place of purchasing an expensive ring and how much interest would it save you? Or, if you’re saving up for a home, how much more of a down payment would a more cost effective alternative afford you? Where will you get the most value that aligns best with what you value?
Anchoring not only challenges our capacity for smarter spending, it can also weigh on our ability to earn more.
We have a tendency to think about out future earning potential in relation to our present salary – after all, raises are often negotiated as a percentage of what we currently earn. If we start out with a low anchor however, we can find ourselves trapped into a pattern of earning way less than we should.
Ultimately, your work shouldn’t be dictated by your past earnings, but the value of your performance today, and how much that value commands in the current market.
If you have to leave your current employer to reset your anchor, it might be worth it.
According to Forbes, “staying employed at the same company for over two years on average is going to make you earn less over your lifetime by about 50% or more.”
A new job gives you the opportunity to re-anchor your salary at a level that’s in line with your desired income.
Related Reading: The Complete Guide to Making More Money
Present bias refers to the constant and unequal battle between your present and future self, with your present self often winning out and making decisions at the expense of your future self.
The disconnect between present and future self is so great that brain scans of individuals thinking about their future selves mirror brain scans of those individuals thinking about strangers.
Because we’re no more connected to our future selves than we are to strangers, we tend to favor choices that satisfy our present self. regardless of how it affects our future self. Unsurprisingly, this can lead to catastrophic long-term outcomes – high debt, insufficient savings, inability to retire, etc.
Scientists have found that when people are given an opportunity to connect to their future selves, either through aged images of themselves or detailed visualizations of their futures, they’re more likely to prepare for that future.
So the more vividly you image your future, the more you heighten your emotional responses to that future become. and the less likely you are to discount behavior like saving or investing that will benefit you later on.
If you can equalize the detail you put into your representation of near and far future, you can make decisions about the two in the same way.
It’s not about sacrificing everything today for the sake of tomorrow, just as it’s not about saying YOLO at the expense of your future. It’s about making financial decisions with equal consideration for both.