Behavioral Finances: How to Break the Bad Habits & Keep the Good Ones

a hand holding up a receipt to see the total amount spent, with a blurred pile of receipts on a table in the background

A recent newsletter from the Personal Finance Employee Education Foundation (PFEEF) sheds light on why people find it hard to break the bad habit of spending too much, and why it may be difficult to save money.1  Studies on behavior and money – behavioral economics – have revealed the thought patterns behind financial decisions and how they can make or break financial success.

Behavioral economics looks at how financial decisions are affected by emotional, psychological, cognitive, and social factors.  Understanding and using behavioral economics can help counteract poor decisions and implement better ones.

Breaking Bad Habits

Habit:  Overspending – people tend to overspend with credit cards and debit cards in particular because they’re disconnected from the actual money they’re spending.

Behavioral Principle:  Loss aversion – the behavioral principle that the stress of losing something outweighs the happiness of gaining something of equal value.

Application:  Break the habit of overspending by switching to cash – you’ll see the physical amount of money you have available and be less likely to let it go.  Another way is to use financial management software that allows you to easily see credit card activity,  so you can be more attentive to what you’re losing.

Tip:  Check out Wallet, a personal financial management tool that houses all of your account and budget information in one place.  Wallet keeps track of your daily transactions, notifies you when you get too close to overspending in a budget category, alerts you when a bill is due, and more.

Keeping Good Habits

Habit:  Savings – building savings helps with meeting goals, preparing for emergencies, and more; nevertheless, almost half of Americans (49%) have less than three months’ expenses in emergency savings.2

Behavioral Principle:  Endowment effect – the idea that your perceived value of an item increases when you feel you own that item.

Application:  Use this idea by getting a picture of what you’re saving up for (maybe a new car or dream home), then place the photo on your savings jar or on your desk at work.  Having a visual of what you eventually want to own can give you a preliminary sense of ownership for that item and for the process of acquiring that item, which can keep you engaged in saving up.

Tip:  You can also keep up this good habit by automatically transferring part of your paycheck into a savings account.  Think of auto-transfers as a positive spin on the problem with payment cards: you’re not connected to the physical money, so it’s out of sight, out of mind, but in this case, it’s helping you financially.

Educating yourself on behavioral patterns can help you be aware of such actions in your own life.  Look at how you use money, and what kind of factors influence your actions.  If you want support and guidance for fixing your own spending habits, talk with a Money Coach.  Your personal Money Coach can be your accountability partner, helping you understand and improve your own behavioral economics in order to have financial success.  They can also help you get started with Wallet.  Call your Money Coach today at 888-724-2326.

1Hoffmire, John and Ben Young.  “Worried About Your Financial Wellness?  Time to Study up on Behavioral Economics.”  PFEEF Newsletter.  May 2015.  Email.  “Financial Security Index: Americans Neutral.”  25 Jun. 2012.  Web.  4 Feb. 2014.