How to Save, Spend, and Think Rationally About Money

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Financial concerns can cause stress, regardless of income level. So, how do we shift our thinking around how to save, how to spend, and think rationally about money?

It entails reframing savings as a means of securing our future, rather than deprivation. Aligning spending with our values and goals, and confronting the emotions and biases that cloud our judgment. Therefore, through these practical ways and a deeper understanding of personal finance, we can navigate the complexities better.

Manage Fear About Money

Irrespective of age or financial status, people harbor fears and concerns about money. This pervasive fear and anxiety prevails within our society, thus the narrative around money instills fear rather than empowerment.

Studies show that people, irrespective of age or financial status, harbor fears and concerns about money. This insight highlights a fundamental issue within society, where the prevailing narrative around money instills fear rather than empowerment. Some norms and systems perpetuate this widespread anxiety surrounding money, making it difficult for individuals to overcome. This then, prompts deep reflection of oneself on how societal structures and cultural attitudes have contributed to your fear. Then, seek to shift towards fostering a healthier and more positive relationship with money for your well-being.

Related: 3 Ways the Emotional Elephant is a Danger to Your Finances

Avoid Narrow Framing

Narrow framing is the tendency of humans to focus only on the immediate problem at hand. Rather than considering the broader implications of recurring patterns, they frame things narrowly. As such end up taking a narrow view of decision-making, resulting in narrow outcomes. It is one of the weaknesses of human decision-making.

In personal finance, people often make decisions irrationally and narrowly. For instance, they will narrowly focus on savings and borrowing at the same time, rather than treating their entire portfolio of assets. This leads them to make suboptimal choices, like saving to borrow and borrowing to save cycle. Their choices, fail to take a broader view. Fail to consider decisions in the context of recurring problems or overarching themes that could lead to better outcomes. As a result, keep resolving the same problems over and over again, rather than make progress towards overall financial independence.

Build Numeracy & Broad Framing

Build your ability to understand and work with numbers. Also, utilize broad framing in making sound financial decisions. These concepts will provide a significant understanding of concepts like compound interest, which can greatly impact financial outcomes, whether one is borrowing or saving.

Additionally, framing decisions broadly and avoiding strong emotional reactions to gains and losses is crucial. By adopting a balanced perspective and maintaining limited emotional responses to fluctuations, individuals can navigate financial situations more effectively. They can make better decisions that are aligned with their long-term goals.

Happiness & Spending

Money can buy happiness – if you spend it right.

People often attribute deep emotional significance to money beyond its practical value. Money is seen as a means not only to happiness but also to feelings of superiority, security, and self-worth. The relationship between money and happiness is complex. While there is a common belief that more money will lead to more happiness, research suggests that this is not necessarily true. Simply acquiring more money does not guarantee increased happiness. Instead, understanding the nuances of how money is spent and the types of expenditures that contribute to happiness is crucial. This challenges the simplistic notion that money alone can buy happiness and prompts individuals to consider the quality and purpose of their spending to enhance overall well-being.

Time is Finite

Recognize the finite nature of time. And, the importance of making deliberate choices about how to spend one’s limited hours on Earth. With a significant portion of time dedicated to essential activities like sleeping and work, we are prompted to contemplate the remaining waking hours and what we truly value. This introspective process leads to existential questions about identity, purpose, and the desired impact of one’s actions. It encourages us to prioritize personal growth, experiences, and fulfillment in pursuit of a meaningful life. This echoes Mary Oliver’s sentiment of embracing the preciousness and uniqueness of one’s existence.

Keep in mind that, spending a significant portion of money on material possessions does not necessarily lead to greater happiness or life satisfaction. Despite the common belief that acquiring more stuff will bring fulfillment, research shows that there is no correlation. There is no correlation between the amount of money spent on personal items and overall happiness. This challenges the notion that material possessions can provide lasting contentment. It highlights the importance of reevaluating spending habits. We ought to prioritize experiences, relationships, and activities that contribute to genuine well-being and fulfillment.

Practice Mindfulness

We can reduce our consumption by around 20-25 percent by practicing mindfulness. By being mindful of spending habits, and questioning the value and impact of our purchases we can naturally reduce consumption. This highlights the significant role of unconsciousness in spending decisions. It underscores the power of conscious awareness in fostering more intentional and mindful consumption patterns. Many individuals report being surprised by the decrease in their spending once they start paying attention to their financial habits. By regularly evaluating whether purchases contribute to their happiness and align with their values, individuals can cultivate greater financial mindfulness. Resulting in making more informed choices that enhance overall well-being.

Learn More: 5 Steps To Developing A Winning Financial Plan

Invest In Experiences

Focusing on others and investing in experiences rather than material possessions can lead to greater happiness and fulfillment. Research suggests that acts of giving are associated with increased levels of happiness. Therefore, experiences such as charitable donations, treating friends to lunch, or buying gifts for loved ones – all increase levels of happiness. Thus, shifting spending habits from acquiring stuff to investing in experiences tends to result in higher levels of happiness. These experiences offer opportunities for social interaction and connection, which are essential for human well-being. Unlike material possessions, which often leave us isolated with our belongings, experiences are inherently social. They facilitate meaningful connections with others. By prioritizing acts of giving and investing in experiences, individuals can enhance their overall happiness and satisfaction in life.

Teach Your Children About Money

It is critical to educate children about money from a young age. We should provide them with the necessary tools and guidance to navigate financial decisions responsibly. Despite the prevalent lack of communication about money within families, it is essential to have open and age-appropriate discussions about money. Particularly, where money comes from, how it is earned and spent, and the concept of debt. It’s crucial to show children the reality of their financial situation rather than shielding them from it. Ignorance can be more burdensome than truth. Additionally, it’s important to limit the influence of money by separating chores from allowance. This allows children to understand the value of contributing to the family without financial incentives. Furthermore, allow them to make mistakes with their money while they are young when the stakes are lower. It provides valuable learning opportunities that can prevent more significant financial mistakes in the future. By empowering children with financial knowledge and allowing them to learn from their mistakes early, parents can better equip them to make informed decisions and manage finances effectively as they grow.

The Goldilocks Point

Shift from the traditional mindset of endless consumption driven by the belief that “more is better”. Instead, shift to a new paradigm that embraces the concept of “enough.” Previously, growth and consumption were seen as inherently positive. This led to an endless cycle of desire for more possessions and material wealth. However, the present challenges this notion by recognizing that there is a point of “enough”. A point where individuals have everything they need for a fulfilling life without excess. This “enough point” represents a vibrant and vital place where individuals can achieve true happiness and self-expression. A point aligned with their values and purpose. It is not about minimalism or deprivation but rather finding the optimal balance, the “Goldilocks point.” The Goldilocks point is the point where individuals have exactly what they need and want without excess. This shift in mindset towards “enough” serves as a pivotal concept bridging the gap between the past and present ideals for around money. Promoting a more sustainable and fulfilling approach to financial well-being.

To Wrap Up

Reframing. How to save, how to spend, how to think rationally about money with the above key points.

Reevaluate your attitudes towards money and embrace mindful practices. Pave your way for greater stability and peace of mind. Be confident, and ultimately unlock the door to financial freedom and a more prosperous future.

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Irene Makanga
Irene has an MBA in Finance and is an avid businesswoman, passionate about financial literacy.

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