Recently I participated in a workshop where one of the topics discussed was financial health. In the popular sense, this would mean something like having steady income, savings and limited debt. Behavioral economics goes further in that it looks at finances and their impact on the physical, mental and social well-being of people and vice versa. I would like to think that by working with buyers and sellers, I am helping to improve not only the financial situation of the client but that it also has a positive impact on the other aspects of their lives. Still, it is an ongoing process to improve our health, to be mentally fit and be financially stable. Just like they say, practice makes perfect so …
Here are a few tips from behavioral economists to practice good financial health.
1. Pay with cash.
Parting with money is painful to us. Behavioral economists call this the Pain of Paying. It is far stronger cash than with credit cards for two reasons. First, cash is more “real” than the idea of paying with a card. Second, the pain is immediate versus delayed, so we care about it far more.
2. Think about your Future Self.
Making a concerted effort to connect with your future self will make you act more in your future self’s interest, especially when it comes to saving. Examples include writing a letter to your future self. For more detail on this see a previous post dedicated entirely to this topic.
3. Make your saving goals concrete.
I’m not talking about a total sum, for example of saving $1 million by retirement. What does that sum even mean in terms of standard of living? It’s far more motivating to break it down into the way you’re used to understanding money – how much that translates to annually or even monthly, for example. Once you think of it as the difference between $60K a year vs $100K a year, it’s been shown to be far more impactful.
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