Humans are not wired to handle money well. Hardly a surprise, right? Maybe you’re thinking about that last impulse purchase or the budget that needs some work.
Why do we have so much trouble managing this essential component of our lives? And what can we do about it?
In a recent article, “Wired for Imprudence,” researchers identified six behavioral hurdles to financial capability. Capability means applying knowledge to everyday, real-world choices. This includes maintaining a budget, managing debt, protecting those who depend on you, creating financial resilience, saving regularly and preparing for retirement.
The six hurdles are:
Cognitive overload: When we are overloaded or must make a quick decision, we often default to the simplest option – even when it’s unwise.
Optimism and overconfidence: We see our lives through rose-colored glasses, and tend to overestimate our capability and underestimate the likelihood of negative events. This can lead to poor planning and risky choices.
Empathy gaps: It can be difficult to understand how we might feel or act in different situations, which means decisions in the moment may not benefit us in the future.
Instant gratification: We’re hard-wired to want what we want right now. This makes us ignore tomorrow’s goal in favor of today’s desire.
Harmful habits: Our behavior can become routine and mindless leading to repetitive spending, such as going out to lunch every day.
Social influence: The actions of others affect our own. Keeping up with the Joneses is no minor offense.
From an evolutionary perspective, these behaviors developed for reasons that served us well. But in today’s financially complex world, they can work against us.
Don’t become a victim of your instincts or bad habits. Here’s how to jump the six hurdles:
Cognitive overload: Plan a consistent time to work on your finances. Create a quiet workspace free of distractions to make your financial decisions.
Optimism and overconfidence: Plan for the best, but prepare for the worst. Build an emergency fund equal to three to six months of living expenses. You’ll be prepared for a crisis.
Empathy gaps: Use cash for discretionary spending, such as groceries, restaurants and entertainment. This will help you adhere to your budget and not compromise long-term financial goals.
Instant gratification: For discretionary items, use cash envelopes to limit overspending.
Harmful habits: Review your spending. Habitual spending can signal expenditures that don’t bring as much joy as the once did. Try limiting their frequency. See if your enjoyment increases.
Social influence: Surround yourself with books, friends and media that help you become the best version of yourself.
firstname.lastname@example.org. Durango resident and personal finance coach Matt Kelly owns Momentum: Personal Finance. www.PersonalFinanceCoaching.com.