Changed Behavior – The Key to Financial Wellness

Every day we’re reminded that handling our finances is never easy. At the end of Q3 2020, the total American household debt reached a record high of 4.3 trillion; 1.6 trillion higher than the record set during the financial crisis.

But financial issues aren’t fates reserved for the working class. The National Bureau of Economic Research found that 16% of all NFL players drafted between 1996 and 2003 went bankrupt within twelve years of retirement. Nicolas Cage, one of the biggest actors in the world, is currently paying millions of dollars in debt, including owing the IRS over $6 million in property taxes. 

It doesn’t matter who you are or how much you earn. If you don’t handle your money properly, you’re likely to fall into debt. 

But how do you avoid this fate? Do you just take a few hours of a financial literacy class every day? Should you take up more shifts at your workplace to try and fill the gaps?

Not exactly. Avoiding these financial traps requires you to change your spending habits and alter your financial behavior. In this article, we’ll outline exactly what that means and highlight some strategies to help you achieve better financial wellness. 

Why do we make bad financial decisions?

Psychologist Daniel Kahneman believes that there are two ways our brains process our world. One is through System 1, which perceives everything through fast thoughts and impulsive decisions. System 2, on the other hand, handles slower and more conscious decision-making habits.

Think of these systems like riding an elephant. System 1 is the elephant (your “wants”), while System 2 represents the person riding it (your “needs”). The elephant reacts based on impulse and emotion. While the rider generally knows better, it’s hard for them to control the beast so they just go along with it. 

For financial decisions, we often find ourselves being swayed by System 1, the elephant, rather than System 2, the rider. You just got your annual bonus. You see a flat-screen TV on sale for $500 and think to yourself, “I can and definitely should buy this.” Your subconscious might tell you to put your bonus into your retirement account, but the elephant takes over and you end up spending that $500. 

There’s also a tendency for younger people to be incredibly optimistic about the future. A recent study surveyed over 75,000 people and found that people generally stay optimistic until about age 55. This could very well contribute to your financial decisions, as people are more likely to lean into their optimistic beliefs that their bank accounts will be fine and that spending a few hundred dollars won’t hurt them too much in the long run. 

What about financial literacy?

You might be asking: “Could I reverse these trends if I took a few financial literacy courses?”

You could, but whether you improve your financial situation depends on how you apply that knowledge in your everyday life. Expert opinions on the effectiveness of financial literacy classes are quite polarized. 

On one hand, this meta-analysis of 201 financial literacy studies concluded that these interventions account for about 0.1% of all financial behavioral changes combined. On the other hand, a report by the German Institute for Economic Research aggregated the results of 126 studies and found financial literacy courses to have positive effects on individual behaviors.

What should we take away from these conflicting reports? The German Institute report claimed that successful financial interventions depend heavily on “teachable moments,” meaning practical applications of personal finance improved the success of certain programs. 

In other words, when we get hands-on experience with handling our finances, we can put our wellness knowledge to good use. 

What can you do to improve financial wellness?

In terms of tangible strategies to combat poor financial behaviors, much of it comes down to taking advantage of your opportunities. 

If your job offers a 401(k) that matches contributions, you might have more incentive to put some of your income away in a safe place. Unfortunately, only 32% of Americans contribute to their 401(k) plans, and less than 70% of U.S. employers even offer these programs, to begin with.

For employees that might not have access to employment-based retirement benefits, there are still practical methods for improving financial wellness. While only 17% of Americans consulted a financial advisor in 2019, it’s a smart move for anyone independently managing their money. Wealth coaches can help you establish emergency funds, track for retirement, reduce credit card debt, and much more. 

Alternatively, your smartphone gives you access to a whole host of mobile applications that can automate or even gamify the money-saving process. These apps help users create budgets, analyze wasteful spending habits, and automatically put disposable income into savings accounts. 

Learn to act on your finances

While we always encourage improving your financial literacy, we also advocate putting that knowledge into practice. If you need guidance on how to do so, there’s no shame in contacting your financial coach that doesn’t earn commissions for selling financial products. Fight the elephant swaying your financial decisions and take proactive steps towards greater financial wellness.

If you want more useful insights on improving financial wellness, check out our blog for more articles!