Behavioral Hurdles: Rose-tinted glasses and no patience
Episode #7 of the course Financial wellbeing: How to worry less about money by Maureen McGuinness
Instead of worrying too much about the future, we have a tendency to bury our head in the sand and pretend everything will be ok. The problem arises when we combine this optimism with a need to have something now.
It’s comforting to believe that everything to come is going to be rosy. We often willingly wear rose-tinted glasses when thinking about our future. Being overly optimistic about our finances in the future can prevent us from taking the necessary action today to start saving money or purchasing insurance. We also have a tendency to overestimate our abilities which leads us to falsely believe that we do not need to seek guidance.
Example: Expecting a 10% bonus or consistent pay raises every year. Relying on the government to provide us with a pension when we retire.
How to overcome overconfidence:
1. Accept responsibility
Whether you’re a man or woman, there will be no knight in shining armor to take care of your finances. If you’re in debt, it’s up to you to get out of debt. If you want a comfortable retirement, it’s up to you to start saving for it today. The sooner you accept responsibility for your financial situation, the sooner you can take actions that your future self will thank you for.
2. Commit to learning
You may be excellent at saving for your retirement. You may already have an emergency fund and life insurance. But, when was the last time you looked at what your retirement fund is invested in? Is it a suitable split of stocks and bonds? Are the stocks in companies that you believe in and respect? Could you find a more competitive retirement provider and pay less in fees? By asking these questions, even if it’s just once a year, you’re committing to growth. You’re admitting that you don’t know everything, and as a result, you’re opening yourself up to further opportunity.
With information at our fingertips, our desire to have access to anything immediately has increased in recent years. We’ve always been susceptible to wanting something now instead of waiting for it. Part of this comes down to the nucleus accumbens in our brains, firing away each time we’re about to buy something. We must teach ourselves patience to manage our desire for immediate gratification.
Example: Upgrading to the latest smartphone. Buying an item or service on impulse.
How to overcome instant gratification:
1. Keep a list
Think about any time that you’ve bought something without thinking about it. This may be difficult, because if the action is automatic you’re unlikely to remember it. The next time you go out, be conscious of everything you pick up to purchase. If there’s anything you pick up that you haven’t planned for in advance, put it down and keep a mental note of it. Add it to a list.
2. Set a savings goal
If you have no reason to put aside money, create a savings goal. Even if you’re trying to save $100 within 3 months, having a small savings goal makes it easier to manage impulse spending. If you want to start even smaller, you can consider saving just $1 a day.
“The Power of Habit: Why We Do What We Do in Life and Business” by Charles Duhigg
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