The Impact of Daily Habits on Your Budget: Part Two

Financial Habits For Success: 

In their paper on financial planning in the Journal of Economics in 2003, Ameriks et al. posed the question of how households that begin with a similar level of wealth and income tend to diverge over time, with some becoming wealthier, while others did not. A leading indicator for future wealth was “propensity to plan,” or the tendency to think constructively about one’s financial future. Those households that developed financial plans with concrete goals tended to control their spending most effectively, increasing their wealth over time. 

“Propensity to plan” can take many forms, big and small, including: 

  • Creating shopping lists to avoid impulse buying. (btw: you can develop and use shopping lists with Wallet by Budgetbakers) 
  • Setting Savings Goals on a weekly or monthly basis
  • Enrolling in a managed retirement plan
  • Purchasing life and disability insurance
  • Regularly reviewing expenses: such as subscriptions, utilities, and other household expenses, to make sure you aren’t overspending. 

Ignoring Distractions: 

Ameriks highlights the importance of planning in establishing and growing wealth. But this is not the only factor that matters. John Beshears, writing in the Journal of Finance in 2015, found that the common strategy by employers of announcing the rates of contribution by employees into 401(k) plans and other retirement savings schemes had a negative impact on employee’s propensity to save outside such plans. Put more simply: knowing that other people are saving as much or more than you doesn’t provide motivation to save – it discourages savings. 

This is what economists call an “oppositional reaction.” Beshears argues that employees who are given information about the savings rates of others tend to feel less motivated to save themselves. In the case of the employee who is saving more than the average, this information may cause them to feel they have “done enough,” and that they are in the best possible position. For the employee who isn’t saving as much as the average, they may lose hope that they will ever catch up to their peers, and this may cause them to stop trying to save or develop better financial habits.

Do Your Own Thing

The research therefore suggests that comparing oneself to close peers is not helpful when it comes to retirement planning and saving. Those with experience in endurance sports such as running or cycling will be familiar with this wisdom: it cannot help the competitor to know their position within the race. One who is far ahead may slack off, while one who is far behind may give up. It’s better to stick to your own pace and follow through with your own plan. 

Though we are all on similar journeys through life, we are never on exactly the same road as everyone else. While it may be interesting to compare yourself to someone of a similar age or background, it may not actually help you to improve your own financial future.

Avoid “Finfluencers”

n.b: It’s also worth noting that while social media finance influencers or “finfluencers,” may dispense interesting advice from time to time, they may also set up unrealistic expectations about how much these tips will help grow your wealth. It’s important to keep in mind that the detrimental effects of negatively comparing yourself to an influencer may outweigh the value of the advice you glean from them. Thus, traditional financial advice from a professional may be a better choice.

Cultivating Positive Financial habits

Across these two blog posts, we’ve seen a consistent theme emerge: those who plan well tend to do well when it comes to better financial outcomes. 

We have seen that we are each divided into a financial “planner” and a financial “doer.” Therefore positive financial habits take into account that our behaviors and self-control are influenced by our tendency to plan. Creating plans enhances our self-control. We have also seen that sticking to a plan is not as simple as making an agreement with oneself. It’s necessary to work together with family and professional advisors to achieve the best outcomes. Meanwhile, comparing oneself to friends and colleagues may not be as helpful as it seems.

Positive financial habits therefore are ones that realistically account for how you think and behave in everyday life. With that said, here are some practical tips that tend to help most people: 

  • Track Expenses Regularly: whether that means daily or weekly, or even monthly check-ins on your spending, having a regular rhythm of checkups will help you achieve your goals. You can use Wallet by BudgetBakers to track your spending across multiple accounts, in real time, getting an overview of your financial health in just a few seconds.
  • Set a Realistic Budget, and Be Flexible: At BudgetBakers, we believe that the best plan is one that can change when necessary. Wallet allows you to create and maintain budgets that match the level of detail you’re comfortable with. Some people budget every cent of their spending, while others use broad spending “buckets.” Some adjust their goals on a daily basis, while others stick with their goals rigorously. Finding the right balance of control and flexibility is key, and that takes time, particularly at the beginning. Don’t give up! You’ll find the balance that works for you. 
  • Automate Your Savings: Another key to financial health is to reduce the cognitive burden that your money represents in your mind. Using services like a 401(k) plan, a managed retirement savings account, or even just budgeting a cash savings goal into your monthly spending can help reduce this burden and lead to better decision making in the future. The fewer decisions you need to make on a daily basis about your money, the better the results will tend to be. 
  • Focus on Your Own Needs: Finally, we have seen research that concludes that comparing yourself to others, either favorably or unfavorably, may not be helpful. Whether you’re doing better or worse than your neighbors, friends, or coworkers today, the ultimate goal is to do better for yourself in the long run. So focus on you, set goals you are comfortable with, and get better at your own finances every day. If you do that, it will be hard not to succeed.
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