This video talks about how emotions and beliefs affect behaviour which influences financial goals. For example fears from traumatic or any other challenging experience such as Covid can influence behaviour even though the situation has changed. He also talks about consumer confidence being low due to information and hindsight bias. Checking the facts will help you overcome your cognitive bias to avoid missing out on opportunities. Hindsight bias is when people predict the present from the past behaviour such as financial hardship to avoid pain. People suddenly have a fear of acting on opportunities due to past challenges which has created a fear. Moreover, people may listen and believe those who tell attractive stories that validate outdated and unhelpful beliefs. This is the halo effect and confirmation bias in action. People who listen to the news to buy shares may miss out on buying undervalued shares as the news may cause them to become overvalued due to following the herd.
Take control of your finances and do the numbers as well as learn about the economy to make sure you are working with helpful thoughts rather than cognitive bias. If you hear about a rumour, do your research before acting.
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Internal and external locus of control has been identified as a mediating factor to financial behaviour and financial wellbeing. People who have an external locus of control believe that the environment influences their achievements or challenges and submit to fate or destiny. People who have an internal locus of control believe that their thoughts and actions influence their achievements or challenges and when they do have challenges they find a way to overcome them. Moreover, research has found that millionaires often have an internal locus of control as they are always looking for ways to increase wealth no matter what the environmental factors are.
As a result, to increase financial wellbeing and improve financial behaviour, you need to increase your internal locus of control and decrease your external locus of control. Additionally, financial attitude, financial literacy and financial belief of capacity to manage finances has an indirect effect on financial wellbeing. Research suggests that people who have higher levels of financial literacy are able to manage their money better, however in a world packed with information on websites, podcasts and other resources we still have many people with unhealthy financial behaviours and financial unwellness. An internal locus of control will increase an individual's capacity to use the information they know about finance for their own benefit and have a healthier relationship with money. They will take accountability and responsibility for their behaviour rather than believe the economy or other environmental factors is the cause of their financial challenges. In summary to increase your financial wellbeing take control of your finances no matter what the environmental factors are. Increase financial literacy and be proactive by using the information to improve your financial situation. Strategic planning will ensure you achieve your financial goals. It is recommended when deciding on goals to start with the end in mind and work backwards. Some people's financial goals may be unhealthy such as hoarders or people who are big spenders so reviewing goals with a specialist can help ensure it is in your best interest. Starting with the end in mind includes thinking about who you will be with, what purpose will it achieve, the emotional outcome and implications, and what stage in life you will be in such as retirement. You may then decide to share your goals with someone who has a healthy financial mindset to consider another perspective. Lastly when thinking about financial goals ensure it is realistic. A financial cash flow projection by starting with the present and looking forward into your finances will make sure you can achieve your goals and it is realistic. A financial projection can also help you identify if you need extra income. For example, include inflation each year to make sure it is in real terms. Thinking about your financial goals and doing a financial projection will help you take control of your finances and make better financial decisions.
Use SMART goals for success. SMART goals will help you be more specific and think in realistic terms. SMART stands for Specific, Measurable, Actionable, Realistic, and Time bound. For example, I want to save $80,000 for a house to purchase in 2 years time. I would then ensure the goal is realistic and detailed in my financial projection and researched properties and the loan requirements. Tell people close to you about your goals so you are held accountable and then plan how you will save for your goal to action it. If you have more than one goal, then priorities. Some goals can wait and others need to be actioned immediately. For example, a goal to save for a boat may have to wait by practicing delayed gratification while paying off a mortgage that will need to be actioned immediately. You may need to work extra to pay for the boat but your financial plan will help guide your decision making. Lastly monitor your progress by placing review dates in your diary to ensure you stick to your goals. Life has a way of throwing challenges and surprises which may mean you will need to adjust your financial plans and time to reach your goals. Enjoy goal setting to improve your financial wellbeing. Research about retirement by financial planners have identified variables that can improve retirement outcomes. Moreover there were biological gender differences between with satisfaction in retirement.
Retirement can be a difficult consideration when a person is young as it requires delayed gratification and long term planning. Having someone help you with thinking about the plan and its benefits can increase motivation. It may also take creative thoughts around investments to consider how to save for retirement and how much money you will need. Everyone is different. Additionally there are different views about retirement. Some prefer to reduce work, some may decide to pursue their passion, others may choose volunteer work they always wanted to do and then there is the caring role or focusing on leisure activities only. However, while considering what retirement will look like for you, the study found improvements to be social network, health, finances, participation in recreational activities, hobbies, social resources and status. The study identified that only 10% were satisfied in retirement while 51% were not. Variables explored in the study was short-term and long-term financial horizon, which means the time during retirement. If a person has short-term financial horizon they are more likely to rent and have debts, compared to those thinking about long-term and prepared for retirement. Most people in the study (18%) had a financial planning horizon for a few months compared to 13% of people who had a few years. Moreover, the longer a person is in retirement and their finances decreases, their ability to participate in recreational activities also decrease. However, if they had a long-term financial horizon they are more likely to enjoy recreational activities for many more years. Another study identified the depression effected the participant's financial planning horizon. For example, a depressed person had a shorter financial planning horizon, compared to those who were not depressed. People who are depressed feel a sense of hopelessness and their decision making includes information bias that leans to information being viewed as negative. Long-term financial planning increased satisfaction in retirement. While the study has limitations such as questions asked, it is an important consideration when thinking about what life will look like when you retire as thinking about long term retirement has its benefits to the quality of life you will have when you retire. Moreover, it is also important to make sure your decisions are not influenced by your mental illness. If it is, then having someone else help you decide and challenge your thinking will improve your retirement planning. Moreover, financial planners considering long-term financial planning will improve their client's satisfaction in retirement. Trauma experiences are different for everyone but essentially it is one or more exposures that is over and above your capacity to cope. However, as it was difficult to cope you may have dissociated which is similar to switching the mind off or a feeling of floating away. This is when the amygdala in the brain tells you to freeze to survive. You may also become aggressive and fight or flight by running. Again this is when the amygdala tells you to fight or flight to survive. These strategies are helpful at the time as they would have been your only way to cope. However, when you continue to use these strategies when triggers occur but your current situation is actually not harmful then you need to process your trauma to heal.
Some people use money to heal from trauma. Flight may mean gambling to cope with the trauma symptoms to avoid noticing what you are going through. You may have felt that money was more important than you when you were young so waste it away as the association is negative. You may spend money and become a hoarder as your things were either given away or as a child you felt your belongings were not valued or lived as a have not of society. This doesn't mean for parents to buy their children whatever they want as it is important to teach them it is normal to do without sometimes but some parents may be neglectful on the abusive side and not consider their child's needs which may include giving away most toys they love. For a child this may be traumatic. Instead get the child to be part of the decision making. Some families are unfortunately poor and the children may grow up wanting to make up for the past by hoarding things to avoid the feeling of lack. People may also use money to feel a sense of belonging that is not real. However the real feeling of belonging may be too triggering as it was a traumatic experience when they were young so a superficial experience is safer. Noticing how you use money can help you identify your coping strategies and if they are maladaptive. Healing from your past trauma may help you change your relationship with money. Have a look at your bank statements which will tell a story of how you use money and then identify the reason why you are spending in such a way by finding the association between past and present. Change your present by healing from your past and have a better relationship with money. Performance management includes ongoing performance development and managing underperformance. Underperformance may occur when an employee loses motivation in their work role, not being challenged enough, bullying and a low wage. Underperformance may also occur due to unclear work expectations, personal issues and external factors such as challenges within the industry.
Underperformance can be managed in various ways such as identify the cause of the issue rather than seeing the employee as the problem. Management may also include regular check ins without micromanaging, supporting the employee with external counselling if personal issues are the cause, review the culture of the workplace and offer mentoring. A last resort usually includes a Performance Improvement Plan. Effective policies and procedures need to guide performance management and dismissal if no change occurs to avoid legal action including unfair dismissal claims. Financial psychology focuses on the emotional, cognitive and behavioural aspects of money where thoughts and feelings about money will influence how you engage with it.
Cognitive bias is often discussed in finance. Cognitive bias can often be unhelpful when it comes to making decisions about money. Cognitive bias is a mental shortcut and allows for faster automatic thinking. Noticing your cognitive bias can help manage money better. For example, loss eversion means that you experience more pain with loss than gaining. So if you are thinking about shares and focusing on losing money then you may avoid buying shares due to your fears rather than reality. It is recommended that you use money you can afford to lose when getting into shares so you can cope with the volatility. Another cognitive bias that may not be helpful is following the herd. You may hear in the media of a particular share to buy without doing any fundamental or technical analysis. People who herd receive confirmation bias when the majority confirm information the investor is thinking instead of research and analysis. Halo effect is another cognitive bias and occurs when people believe information from a source that has good standing without checking if the information is actually accurate. Psychologist Daniel Kahneman encourages to think slower to avoid making wrong financial decisions as fast thinking can be loaded with bias that won't help. Therefore, step back and consider if it is best to analyse the information before making any decisions about money. Research indicates that families who have dinner together develop emotionally stable children. Dinner can be space where parents and children talk about their day as well as share, acknowledge and self regulate feelings together. Dinner can also be a time to talk about money and economics. Money is usually taught in schools but it is helpful for parents to expand the topic and improve thoughts and feelings about money. However, it is also important for parents to check in on their own beliefs about money to avoid contaminating the discussion with negative beliefs and thoughts.
Negative beliefs and thoughts can be generational and you as a parent, if aware of your own, can break the generational habit and distil new and healthy beliefs about money to your children. Money is invisable now as finances are distributed through online transaction or cards. Giving children pocket money and encouraging them to distribute it in money jars can help them see the money, learn to budget and also possibly give away some to a charity to learn about caring for others and other people's needs beyond their own can help build financial literacy and improve their relationship with money. Bring money into family discussions and check in with yourself to ensure the conversation is healthy rather than negative. If it is negative you may need help through counselling to improve the way you see money so you can create a healthy money story with your own children. Since the rise of social media and people spending more time online and engaging in environments that are desirable, spending habits have changed. It used to be people wanting to keep up with the joneses meaning people in their local community but the aspect of local community has changed. Community may mean your Facebook friends, Instagram network and X. The problem with social media is that people can post anything that does not accurately resemble their life but seems convincing. It can be a temptation for people who are emotional and need things to help them fill the void and feel better.
Moreover, online spending which also includes online shopping that may not be on social media need less effort to spend rather than getting dressed, getting out of your home, starting your car, going for a walk and walking into the store. People who are hoarders and compulsive spenders need extra psychological support to manage their habits as it is not that easy. Moreover, people may want extra help to review their lifestyle and change their habits to improve spending habits. However here are some tips that can help manage the spending. - Do a 5 year budget with projections that includes inflation and focus on your retirement plan to determine how much you need. This can help you identify how much you can spend so when you are online you have a framework to work with. - Practice delayed gratification. When you practice delayed gratification you may realise that you actually don't need the item. You can improve delayed gratification with mindfulness. - Review your lifestyle. Ask yourself questions such as do you really need all this stuff? Is it better to browse than buy? What is the meaning of your life and what would you rather do with the spending money you have? Travel, save for investments, spend time with people? Is the stuff really filling the void or making you feel worse? Unhelpful spending habits can create depression, anxiety, and a rift between family and friends. Shift your focus to a healthier lifestyle and learn to have a better relationship with money. When an advisor meets a new client and gets to know them, they have systems in place to learn about their relationship with money, financial literacy and situation. Step one of the six steps of the financial advice includes building the relationship between the financial planner and client and step two involves collecting information before any advice is given. If step one and two are not established well, then the client will less likely accept the advice as the trust would not have been established.
Trust is built when there is interest in the other person's story through discovery questions. The planner will have interest in the client's family history, relationship with money, current situation, work habits, and future goals through curiosity . The focus on the client's past, present and future story needs to happen before the focus on numbers. The planner needs to remain curious rather than assume the client's story. Curiosity is the process of not knowing, remaining interested and asking open ended questions. Structured questionnaires can be used together with non structured questions. Non structured questions gives space for the client to tell the story beyond questions in the questionnaire. The planner will facilitate the process by using their skill to guide the client. Trust will increase the planners ability to gather complete and accurate information where appropriate financial advice can be provided. Trust built through curious and genuine interest in the client's story will show the advisor cares. Trust can also be developed through empathic listening, listening to non-verbal cues, active listening, eye contact, micro communication, and giving the client the space to expand on short answers through 'tell me more' questions. These communication strategies can build connection and deepen understanding in the client's story. Trust will increase the client's motivation to implement the strategies in the Statement of Advice. Have a desire to listen, remain curious and ask questions with empathy as people's view about money is personal and connected to an emotional story that won't be disclosed unless trust is built. Through curiosity, empathy and a genuine interest in the client's story, a stronger relationship between client and advisor will develop. The client will feel heard and respected. |
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February 2024
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