If we are all honest with ourselves, we are not always rational when we make decisions. Often our emotions, biases and social influences get the better of us and undermine our wellbeing.
For instance, suppose a married couple is suffering because one spouse is jealous of the other due to the latter’s career success.
Objectively, perhaps the first person should be happy for the second. After all, a thriving career can be personally fulfilling and it could benefit the household’s overall finances. Yet it can be hard to put our emotions aside and choose to put others’ needs first.
On money matters, our sense of financial wellbeing can also be eroded by poor choices. A common example is compulsive spending or excessive “retail therapy” which can lead to a depleted bank account and debt problems.
In financial planning, human apathy may lead some people to not take appropriate action now to benefit themselves later. For instance, maybe you leave your tax planning until the last minute, days before the April deadline. Or, perhaps you delay thinking about your pension contributions until later in your career. At which point, you might have a lot of catching up to do.
Behavioural finance, in short, affects our financial wellbeing in significant ways. Below, we offer some ideas to help people change specific habits that could lead to less stress, lower anxiety, better physical health and improved relationships.
Set realistic expectations
Many people crave what they cannot realistically have. Or, they want it now - not later, when it is more likely to be possible. For instance, perhaps you hope to become a director at your workplace within just a few short years of joining the team. Unless you have been brought in specifically to be trained for that role, this outcome is unlikely.
In the world of money, unrealistic expectations can lead to problems such as living beyond your means. This can leave you vulnerable if conditions change - e.g. you lose your job and need to take a pay cut. It can also be very stressful living payday to payday, not being able to make significant savings or achieve other financial goals.
A good starting point to set realistic financial expectations is to craft a budget. What money is coming in each month and how much can afford to go out? How much should you apportion to needs, wants and savings (e.g. 50%, 30% and 20%)? Answering these questions helps you feel more in control of your money - rather than it controlling you.
Sometimes, the opposite problem happens - people underestimate what they could achieve. Here at Punter Southall Aspire, for instance, our process of talking to clients has sometimes shown them that they could retire earlier than they expected. The result can be a huge boost to a client’s wellbeing - creating excitement about new possibilities.
This shows the potential benefit of another area of behavioural finance. Rather than trying to figure out everything on your own, it can help to get professional advice. This process can highlight risks and opportunities that you may have overlooked.
Have you ever missed a bill or other important payment? It can be very upsetting, particularly if this results in a penalty. Forgetfulness is very common - especially if you are tired and busy.
Fortunately, it has never been easier to automate many financial tasks. This reduces the stress of needing to remember manual payments, also lowering the risk of human error.
A good practice is to try and automate your savings and investments. As an employee, your workplace pension contributions and National Insurance (NI) will likely already be automated under the auto enrolment system. Yet what about other areas?
One idea is to set up automatic bank transfers to your ISA(s), savings and investment accounts after you’ve been paid. Also, consider moving bill payments to be due at the same time. This means that most of your expenses are dealt with at the start of the month and you can regard most of the money left in your account as “yours” to spend freely.
Prioritise your wellbeing
In 2020, Ipsos MORI conducted research on the link between behavioural science and financial wellbeing. It revealed that, for people to experience more financial wellbeing, they need to consciously make it a priority.
However, many factors can determine whether people do this such as scarcity, self-control, self-efficacy, confidence and shame.
Scarcity, for instance, refers to a lack of “mental resources” - stopping people from reflecting analytically on different choices which could affect their financial wellbeing. This can lead to a focus on immediate needs, such as paying the next bill, rather than the long term.
Shame - feelings of inadequacy relative to others - is a particularly powerful force. Perhaps someone is embarrassed about some poor past decisions they made with their finances, leading them to avoid the professional advice they might need to get back on track.
If you are not prioritising your financial wellbeing, ask yourself why this might be. If the issue is scarcity (you are a new parent and barely have the chance to sleep, let alone think about money!) then how could you give yourself “space” for some cognitive resource?
For instance, could a grandparent or other carer look after the kids for the afternoon? You could then spend a few hours in a quiet spot to explore your financial goals.
If the driving issue is shame, it might help to be kinder to yourself. Most people have made big money mistakes and there are few that our financial planners have not seen! If you do not have a pension, for example, then it is likely not too late to start one.