Have you ever noticed how some people enjoy abundance, while others seem to live paycheque to paycheque? Some believe they’re doomed to a life of struggle. Others have subconscious beliefs about money that sabotage their financial efforts.
“Money is hard to come by.”
“I don’t know how to invest money.”
“My type of job doesn’t make good money.”
“I wasn’t born to be rich.”
Do any of these sound familiar? What you think about money influences your relationship with money more than you realise. To break bad money habits, you need to become aware of any cognitive biases you have around money and change your mindset.
How your mindset impacts your bank balance
We all harbour core beliefs around money. These core beliefs inform our behavior, and our behavior impacts our financial decisions. Change the money script in your head and your bank balance is likely to change accordingly.
Let’s look at some common cognitive biases that influence how we manage money.
1. Recency bias
Humans tend to default to the most recent information or experience. Recency bias makes us place too much emphasis on recent information to the detriment of future planning. If you are earning well now, you may forget about previous lean years and overlook saving. This will leave you unprepared for a financial challenge in the future.
Don’t jump into a purchase without doing your homework, as that can often be a recipe for disaster.
2. Sunk cost fallacy
Sunk cost fallacy makes us stick with past financial decisions even if they no longer make sense. This type of bias causes someone to hang on to a subscription they no longer use rather than cancel it. “I already paid for the year so I might as well keep it.”
3. Confirmation bias
Confirmation bias makes you seek information that backs up your point of view and ignore anything to the contrary. This can lead to bad financial decisions. For example, when buying property, if you have your heart set on a specific area, you’ll focus your research on all the reasons to buy there rather than compare various neighbourhoods to find the best deal.
4. Bandwagon effect
The bandwagon effect makes us want to copy what others have and buy things we don’t need. If most of your friends are sporting an Apple Watch, do you suddenly feel the impulse to buy one? Ask yourself if you really need it or if you’re simply jumping on the bandwagon.
5. The ostrich effect
If burying your head in the sand is how you generally handle challenges, you’re likely to do the same with money. Drowning in debt? Avoiding the problem won’t make it go away. It will only snowball as penalty fees and interest are added. Putting a debt consolidation plan in place might be a better approach.
Building wealth through property won’t suit everyone, but done right, it can be a successful strategy for some.
6. Status quo bias
People with a status quo bias tend to stick to what they know. It’s the “better the devil you know” philosophy. If you’ve always bought a particular brand, you continue to buy it without considering that there could be another product that offers better value for money.
7. Emotional reasoning
Emotional reasoning makes us do things based on feelings rather than facts. This is one of the hardest financial biases to break. When emotions are involved, we’re not easily swayed. Someone using emotional reasoning will find a way to rationalise bad spending habits against all logic.
Money biases like these block financial growth. What goes on in your head affects what happens in your wallet. A thought leads to an action that results in an outcome. That’s why wealth is available to anyone who believes it is attainable. If you believe you deserve more money, you’ll take steps towards acquiring more of it.
