Financial advice often focuses on setting realistic financial goals and finding ways to meet them. We’ve got another idea. Why not consider focusing less on the goals – which people often struggle to meet – and more on financial behaviour modification? You may have a better chance of success if you do. Here’s why.
Never Confuse a Symptom with a Cause
Let’s say you’ve got a messy personal bookkeeping system and you decide to clean it up. So you clean it up and now you’ve got a bookkeeping system that appears to work. But if you maintain the pack-rat habits that got you into the messy bookkeeping system in the first place, you’ll soon be looking at a new pile of clutter.
You’re left chasing the same outcome because you never changed the system behind it. You treated a symptom without addressing the cause.
Consider this. Perhaps the key to setting realistic financial goals is not simply to set them. The key is to change your daily financial behaviours so that achieving your goals is – if not inevitable – at least more likely.
A Step-by-Step Approach
Money, like a stock, doesn’t have a conscience. Money is more like a dog or a horse. It responds to enlightened treatment, a guiding hand and a sense of purpose. Rather than focusing only on an overarching financial goal, consider adopting a step-by-step approach.
Small, consistent financial decisions can add up over time. By focusing on behaviours you can control – how much you save, spend and invest – you can create habits that support your longer-term financial objectives.
9 Behavioural Rules for Recovery
Drawing on principles from behavioural economics – including the work of Kahneman, Tversky and Thaler – here are nine simple approaches to consider:
- Pay yourself first. Set aside part of your monthly income – whether from a salary, investments, OAS or other sources – for savings and longer-term priorities.
- Live within your means. Avoid consistently spending more than you earn. There’s a difference between price and value. Learn to recognize it.
- Clarify and de-clutter. If everything is important, nothing is. Apply that principle to spending, too. Identify what genuinely matters and reduce spending that doesn’t support your priorities.
- Automate. Make inertia your ally, not your enemy. Consider setting up automatic deposits from your chequing account to your savings or investment accounts so you don’t have to remember to transfer the money yourself. Budgeting and financial management tools can also help you monitor your progress.
- Disrupt the cycle. Think through your typical day or week and identify where you regularly spend money. For expenses that aren’t adding value, make a proactive plan to eliminate or reduce them.
- Avoid temptation. Oscar Wilde once quipped, “The only way to avoid temptation is to yield to it.” It’s extremely funny. Just remember, he was joking.
- Continue to invest. Regular investing can be an important part of building long-term financial security. Invest according to your financial plan, time horizon, risk tolerance and ability to contribute.
- Create a budget. A budget can help you understand where your money is going and ensure your spending reflects your priorities. If you need help creating a budget or broader financial plan, consider speaking with a financial advisor.
- Don’t try to change everything at once. You can’t change the habits of a lifetime overnight. Focus on manageable improvements and build from there.
The Sooner You Start the Better
By incorporating these behaviours into your life, you can begin to strengthen your financial situation over time. It won’t happen overnight, but consistency can make a meaningful difference.
Because these approaches are behaviour-based, they can also provide a sense of progress each time you follow through successfully.
Aim for consistency, not perfection. Avoid paralysis by analysis: don’t drive yourself crazy debating every purchase. Instead, rely on the guidelines you’ve set for yourself until those behaviours become increasingly automatic and habitual.