When it comes to spending less and saving more, it’s tempting to bury our heads in the sand. The more research and writing we do about money, the more we realise the odds can be stacked against us. The way we manage our money today is very different from the way money was managed in the past – it’s getting increasingly easier to spend money, and increasingly more complex to save money.
But what if it’s this single factor that ultimately drives your financial success? Getting this concept right doesn’t necessarily mean ‘cutting back’ – it actually means that you’ll be able to invest more on the things you truly enjoy, have the freedom to pick and choose your lifestyle, and have financial security available in the event of sudden emergencies.
When done right, budgeting can direct a series of smart choices with your money to move you closer to the things you want out of life sooner. When your planning and strategy align within these areas, a successful budget allows you to work more money out of your current income. When utilised smartly, this means you’ll be significantly closer to building up your assets and investments for the future. Take the time to get this right at the start, and you’ll give yourself a massive advantage and benefit off the results for years to come.
There’s a surprising number of psychological and emotional decision-making processes that drive the way we manage our money. Decades of research has shown how our inbuilt decision-making processes can make it more difficult to get the outcomes you want from your money. The effect of these biases and decision making systems are subtle, but their impact is significant. Most importantly though, recognising and understanding these factors is the first step to overcoming them.
Here are some of the biggest hacks you need to understand the money bias system, and make it easier to get the results you want from your money:
1. Create small barriers to curb impulsive spending
Think about how all your pay is deposited into your bank account with online banking. Your online banking app will often show your everyday account right next to your savings account, where dipping into your budget is only a quick swipe away, or a credit card is within easy reach. The ability for debit or credit cards to be loaded directly onto your phone with fast payment options makes it even more tempting. There’s no barrier between you and your money, so it becomes easier for you spend more and get off-track.
Put some small barriers in place between you and the impulse for quick spending – whether that means using a biometric login or passcode on your banking app, adding a longer password or only using your online banking on your laptop – and because the funds aren’t automatically within immediate reach, you’ll be less tempted to spend.
2. Remember that your willpower is a limited resource
Think about a time when you’ve been on an intense health-food kick, or working towards major milestones in your career, or trying to cut back on your weekly spending. When you’re flexing your willpower in one areas, resisting temptation in other areas can be just that extra bit harder. We’ve been working so much on this, so we deserve a treat! When we’re working hard, we can find it easier to give in and justify a big-ticket expense or booking a vacation – because you’ve earned it, right?
When it comes to your overall finances this will create a steady impact over time, but when it comes to your day-to-day savings and spending management, the impact is even bigger. The more you have to use your willpower to stick to your weekly spending budget, the more likely you are to give into temptation – and the less you’ll have left to allocate in other areas of your life.
To avoid dealing with the impact of ‘willpower depletion’, try setting up your everyday money management in a way that doesn’t require your willpower to work! Your day-to-day expenses shouldn’t be always on your mind, so creating a system that works for you and can be realistically used will benefit you most in the long run.
3. Resist the urge to stick to your ‘defaults’
As humans, we have this in-built, deeply set tendency to resist change and stick to our ‘default’ settings. Our defaults are our everyday comfort zones – we don’t have to think about them, we don’t have to expend any energy on them, and quite often we’re on autopilot when we’re engaging them.
Change can be uncomfortable, usually because it means we have to spend energy to work towards it. Even when it comes to money, we’re happy to keep maintaining our status quo.. Even when we know we aren’t getting the results we want or could get with a little extra input, we don’t change – because it’s simply easier to stick to our defaults.
When you’re structuring your personal and everyday spending and saving, keep in mind what your default setting is. Change this towards the outcome you want! Automate your savings. Automate your debt reduction. Automate your investments. A short burst of effort now will reduce your mental strain, and help you establish longer-term constructive money habits.
The bottom line – find a system that works
Most things in life can be broken down into a process or system that you can follow to achieve the goals you really want. Your savings and spending is no different, although we do understand for our clients that especially when it comes to money and finance, it doesn’t always come naturally.
A great savings and spending plan or strategy is really important, but a great plan on its own won’t get you great results. You’ll need a system that supports the plan to make it work, one which makes it easy, and most importantly, will make it really happen. Manage, tweak, automate and deduct where it feels most natural to you – whether it’s every paycheck, your monthly debt repayments, or even your morning cup of coffee. Find a savings plan that works for you.
This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.