Understanding the why behind the what when it comes to financial decisions
Money and the Brain
Specifically, you'll learn:
- The common barriers that get in the way of achieving financial goals.
- How to regulate your emotions in situations where you feel inclined to go off plan.
- How to use your money to become the person you want to be with the why, what and how framework.
Key benefits
Understanding what’s going on behind the scenes and thinking critically about how you're experiencing the situation can help you:
- Overcome internal conflicts.
- Stick to your plan.
- Experience more happiness and fulfillment with your money.
Understand the brain
Watch the following video to better understand how the brain processes information in decision making.
MONEY & THE BRAIN
Recognizing where your reactions originate and how your brain processes information can help you think more critically about your decisions, especially in moments where you feel inclined to go against the plans or commitments that you've made for yourself.
—Scott Sherman
Can you tell which part of the brain is used during these decisions?
Understand barriers to success
After watching the video, use the following questions to recognize and find ways to overcome your barriers.
1. What are your money scripts?
- Where do you think they came from?
- What ways have they been true/not true in your life?
- Are there different approaches you can try that might bring you closer to success?
2. How have your emotions affected your financial success?
- Describe a time when you were able to overcome the emotions in the moment.
3. What habits help you achieve financial success?
- Which ones get in the way?
4. Identify unrealistic expectations and list ideas to overcome them.
Gain emotional control
Now that we know how emotions play a role in our financial decisions, we can learn strategies to regulate our emotions and stay consistent with our values. This will keep us on a path toward achieving our financial dreams.
Narrow your focus
It’s normal to want to make a bunch of changes at once. However, it can also set us up for failure. To avoid becoming overwhelmed, it’s important to limit the number of goals or changes to fewer than three. Some people find the best success with focusing on one behavior, and when that behavior becomes easy, they add another behavior.
Focus on more instead of less
This can be a way to avoid feelings of deprivation as you work toward your goal. For example, instead of saying something like “go out to eat less” or “spend less on online purchases,” you can say “deposit more into savings so I can take a vacation” or “pay more on my debt.”
Remove unnecessary distractions
Removing marketing text messages and emails, apps and notifications can help minimize distractions and keep you focused. Marketing emails are notorious for activating our emotions and may lead us to making decisions that don’t match our goals. Unsubscribing from those emails and text messages helps us avoid potential distractions.
Review your progress
Regularly reviewing your progress toward your goals not only allows you to see how you’re progressing, it also creates motivation to continue moving forward.
Consider the moment
Taking the opportunity to consider the moment can help you identify situations where you’re acting on an emotion rather than using rational thought to decide. Asking yourself questions like “What happened before I felt like this?” can help you understand what has triggered you to take the action you want to take.
Take a deeper dive
Taking a deeper dive can help you identify the underlying feelings about the situation. Ask more questions to activate the cerebral cortex and think more critically about the emotions you’re feeling.
For example:
What is making this feel like a threat or reward?
Can a different decision yield a similar experience?
Example scenario
Your friends are talking about a new home security system that is on sale for Black Friday. You already have a smart doorbell, but you feel like you can't miss this deal.
The new security system is normally $425, but you can get it for $375 plus free, two-day shipping. You didn't plan ahead for this purchase, so you carry the balance on your credit card for the next 14 months. The credit card charges a 20.99% interest rate.
In addition to understanding your underlying feelings, start to recognize potential options that will lead to better outcomes. This will help you stay on track with your long-term financial plan instead of getting derailed by impulse purchases.
STOP
STOP is an acronym you can use when you experience conflict between what you want to do in the moment and what you’ve outlined in your why, what and how framework.
When you are experiencing intense feelings about a decision, you are more likely to make decisions that can lead you away from your plan.
STOP can help you slow down and think clearly during times where you experience a heightened emotional state. Here are the steps for STOP according to Russ Harris, author of The Happiness Trap.
Recognize mental and physical cues
Our brains and bodies give cues we can learn to recognize. Recognizing these cues helps us know when we need to practice STOP.
The why, what and how model
The why, what and how model helps us recognize who we ultimately want to become and how we can leverage our money to help us get there. In this section, you’ll learn how to determine your why, what and how. Then you’ll have the opportunity to apply this model to your life. Revisit it often as a structure for accountability.
- I want to be financially secure.
- I want to have more money available to provide for the needs of my family.
- I want to have more money available to create memories with my family.
- I will pay off $4,500 of debt in three years by paying $125 per month.
- I will build an emrgency savings that can cover three months of expenses in two years by saving $500 per month.
My priorities are:
- Hold a weekly budget review with my partner.
- Set up automatic transfers for:
- monthly payments.
- secondary savings accounts for upcoming expenses.
- Set up a payroll deposit to a savings account.
Our values can lead us to our why. However, our why is not limited to our values. Our why can be a feeling, such as a sense of security, a purpose or a vision. When we use money as a tool to live out our why, we will feel more fulfilled and happier.
What: Your what is essentially the goals you plan to accomplish. Think of your goals as milestones to affirm that you are living your why. As you identify what you want to achieve, use the SMART goal model to help you create a plan. Another consideration, particularly for financial goals, is how time affects your strategy.
For example, if you have a milestone you plan to hit within the next year, you’ll want to budget and set that money aside in a separate account from your emergency savings. For goals longer than a year, you will want to save using traditional or higher-yield savings accounts to help you keep track of your progress. For long-term goals, investing can be a great tool to grow your savings over time.
As you create your plan, identify the actions needed to achieve your goal and list out the frequency of those actions.
The actions and frequency depend on your goals. Here are some examples:
One-time
- Set up automatic transfers to debts
- Modify the frequency of the account updates you receive on your 401(k) account
Recurring
- Shop for insurance policies annually
- Plan weekly budget check-ins by yourself or with a partner
- Review your credit card statement and pay off your balance every few days
It’s critical to recognize potential problems with your plan. Consider factors like scheduling and how your emotions may impact your plan, especially if you’re planning to make significant changes. Awareness of your ability and willingness to follow through on your plan will help you identify areas of concern and modify them to better fit your needs. Finally, consider whether your expectations are realistic.
For example, let's say you decide to cut back on preference purchases to pay more toward debt. You commit to reallocate $750 per month in your budget. For some, this amount may prove to be too restrictive or impossible to maintain. Recognizing this allows you to reevaluate and start with a new goal of $400 each month. Over time, you may be able to gradually increase this amount.
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