Create Habits to Make Good Financial Decisions

CATEGORIES: Investment Planning

Good Financial Habits
Every morning we wake up knowing that throughout the day – more than once – we will have to make  financial choices.

Heading out of the driveway, we cast a quick glance at the gas gauge and make a mental note of whether or not we’ll have to fill the tank. Walking into the office lobby means considering whether to stop at the Starbucks or suffer through the free coffee in the office kitchen. The pin-up note on our desktop calendar reminds us that payment for Lizzie’s school field trip is due in two days. And so it goes.

But there’s something missing as we navigate this course of daily financial decisions: savings and investment decisions. Making good financial decisions means broadening the definition beyond “spending.” We need to make big decisions that impact our financial future. And that may require changing some built-in habits.

Out of Sight, Out of Mind

The basic problem, of course, is that there are fewer deadlines that force us to think about long-term investing.  Those decisions don’t present themselves for urgent resolution.

If we don’t pay our electricity bill on time we can expect very near-term consequences, so that decision commands our attention. If we don’t save for retirement, we might not notice until it’s too late.

Our brains can only juggle so many things at once, and we place a higher priority on making sure we’re not sitting in the dark than we do on making sure that our retirement account has the right asset allocation.

But this leads to a situation where we compartmentalize our financial decisions. We fail to realize that our spending and savings/investment decisions come from the same sources of income, and the decisions we make for one category affect the others as well.

Breaking One Habit, Starting Another

So how do you break the habit of focusing only on your spending decisions? Ideally, you should create a new habit. Our brains love habits. Habits save brainpower; the more we become accustomed to doing something the less active brainpower is involved in doing it.

Think about the first time you ever drove a car. Your brain was going 100 miles a minute with all the new and unfamiliar decisions to be made. How much pressure to put on the gas pedal. When to look in the rearview mirror. How soon before a stoplight to start applying the brakes.

After a while all that became routine. Now your brain stays pretty chill while you’re backing down the driveway. Piece of cake, right?

So the trick is to create a set of activities around your savings/investment decisions that becomes as regular and predictable as writing out the weekly grocery list.

A Little Organization Goes a Long Way

Start creating good financial habits by organizing your records. This may sound like the stuff of failed New Year’s resolutions, but it doesn’t have to be hard. Here’s how to do it:

Divide your income sources among three categories: your necessities (housing, utilities, food and transportation), discretionary spending (restaurants, those cute new shoes), and savings/investment items. That last category includes your retirement investments, emergency savings and savings towards big-ticket goals like college education.

Try to spend no more than 50% of your net monthly income on necessities and between 20-30% on savings/investment items. Leave the balance for discretionary spending.

Creating a spreadsheet that tracks this is simple, or you can use one of many services out there like HelloWallet or Mint to track your spending. Sit down once a week to review your weekly spending. You’ll have the savings/investment data at your fingertips as well.  Soon, it will become a habit – and you’ll be on the way to a more successful financial future.

What are your financial decision making habits? Tell us what you think.

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About the Author

Katrina Lamb is a CFA for Jemstep. She has over 25 years experience in economics, finance, international development and management strategy, with a strong focus on global markets. She provides a voice of clarity, logic, and reason in an environment characterized by high uncertainty.

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