Having a healthy perspective can help manage debt and learning from experience can help you avoid debt in the future. For example, ongoing budgeting, saving for an emergency fund, living within your means and being realistic about money.
The normative principle can guide debt management and decide which to pay off first. Most people prefer to put the same amount on all debts or according to the debt account aversion pay off the smallest debt first. According to the normative principle, it is best to pay the minimum amount of all the debts to avoid paying fees and surcharges. Then you would use the remaining money, if any, to reduce the debt with the highest interest rate. When that loan is paid off then you move to the next debt with the highest interest rate. By continuing to use the normative principle you end up paying all your debts and paying off the last with the least amount of interest rate. However, from a psychological point of view, consumers don't consider interest compounding and won't use the normative principle. Instead the consumer will use a mental short cut and reduce all debts equally. When you are paying the loan with the highest interest rate you are actually making your money work for you. For example, if you pay a loan or credit card debt with an interest rate of 20% rather than one with 15% then you are reducing 20% on top of the debt each month and effectively paying more. Twenty percent compounded each month adds up compared to 15%. Working to reduce one loan at a time while paying off the rest at the required amount will also make debt management less overwhelming as you are focused on paying one debt quicker rather than all of them. You are more likely to manage debt better by breaking up your goals to smaller subgoals. People often focus on reducing the smaller debt first as it offers relief that one debt is diminished when in fact it is not logical as the smaller debt's interest rate may also be smaller making debt management less effective. However, American financial specialist Dave Ramsey advocates on consumers making some win by paying off the smaller debt to make debt management more achievable rather than paying off the one with the highest interest rate first. A study investigated participatants who were told about the interest rate and which debt to pay off first. Meaning they were encouraged to pay off the debt with the highest interest rate first, however not one participant followed the financial advice and preferred to pay off the smaller debt first. The instructions were changed from complex to simple which did not change financial behaviour. Financial literacy did not even change behaviour. The participants made the best decision when they were not allowed to close the account. Closing the account quickly would have offered relief but would not be the best financial decision. Therefore, reducing the ability to pay off small debts by creating challenges with closing the accounts worked better than offering financial literacy and advice, due the debt account aversion mindset. The participants were more focused on reducing the debts than saving money. On the other hand at least it encouraged them to pay the debts off. In summary heuristics play a role in financial decision making more than financial literacy and advice. However, while it may not be the best decision, if it motivates people to pay off debt that it is helpful. While debt account aversion can help motivate people to reduce debt, being aware of heuristics and focusing on how to manage money more effectively is the better option.
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Thinking outside the square is a useful strategy sometimes required when you are stuck on how to make extra money.
Before thinking about creativity you need to check in with your mental health as depression and anxiety can get in the way of thinking creatively. Having hope can help you improve how you are feeling. Completing a K10 can help you check where your mental health is at. K10 is a screener not a diagnostic tool but can help you identify if you are depressive (usually sadness over past issues) or anxious (worries about the future) as these emotions can influence on how think. You can complete a K10 here https://www.blackdoginstitute.org.au/wp-content/uploads/2020/04/k10.pdf If you are depressive you may overlook opportunities and if you are anxious you may worry about your ideas not working. If you are doing well in your mental health you may then have more hope about your ideas and willing to take a chance. Creativity is thinking outside the box. Thinking about ideas that are not usual. Trust is required as people may not see what you see. Choose who you talk about your ideas and keep working on it to allow it to unfold. You may choose to research other people's ideas and see if you can expand on it. Making money ideas include people selling what people see as useless but other people need, Air B'n'B as a side hustle, you may have a consulting idea or decide to sell online. These may not seem creative but you can add a creative spin on them to develop a niche. If you are financially struggling, there is always a way to make more money. However your mindset may be in the way of thinking about ideas, to find the motivation, hope or even implementing any ideas. Working through your mental health may be the first step. Sharing your ideas with someone who is objective and allows you to think outside the square may also be helpful. Stay focused on your ideas however creativity requires you to lose focus and dream a little. Have plan and when you think of something that sounds out of the ordinary write it down and expand on it. Research to see what other people are doing and collect your thoughts to see where the picture is going. Step back sometimes but staying focused may be the hardest as sometimes you may think that it isn't going anywhere or not worth much but you won't know unless you try. You may think you don't have the time to do a side hustle and or any creative strategies. Again this may be your mental health getting in the way. Improved mental health can increase energy and willingness to try something different. Take one small step each day so it won't seem overwhelming. If you are not coping financially right now and can't wait then you can see a financial counsellor from National Debt Helpline to work through your budget and services such as myself can help with your mental health and budgeting as well. There are also Employee Assistance Programs who can offer free counselling and helplines such as Life Line and Beyond Blue who can help with a single session approach. If you have money that you can invest but not sure how then see a financial advisor to help you with wealth management. You can find one on the Financial Advice Association of Australia website https://faaa.au/ Another tip while thinking of a side hustle or building on your ideas is to learn from experience. Learning to cope when high inflation exists is to have an emergency fund so you can cope financially when there are unexpected challenges. Save at least 3 to 6 months of your expenses in your fund and don't use it for anything else other than bills. If you don't need it then it may become handy for when you retire. Enjoy wealth as you deserve it! Hoarding may include challenges with spending which is called acquisitions or avoiding throwing things out. Online spending is a challenge with people hoard, who using spending to manage emotions or challenges with managing impulsive behaviour. Purchases may be planned or unplanned, however purchasing goods online can influence impulsive behaviour as there is a lack of deterrents that can help with managing impulsive behaviour and planning. People often go online to buy a planned item and then spend more than expected. Sometimes items are grouped to influence more spending. Conscious decision making require the ability to step back and reflect. Moreover, stimulus can influence behaviour for online purchasing. Stimulus may include special deals which can cause the cognitive bias of fear of missing out. Research shows the group shopping such as Groupon and unfamiliar brands influence impulse spending and can be a challenge for a consumer who struggles with impulsive spending, hoarding or emotional control. To increase online spending retailers limit physical stores, reduce mental and time effort when spending and improve the shopping experience. To reduce online spending, the consumer would need to create a strategy where more time is required when spending and the fear of missing out is reduced by realising it is an illusion. When spending online, have someone with you to talk through the process so you can think while talking, take your time and think about the purchase, don't spend online if you are emotional but work through your emotions by contacting a helpline, writing in a journal or talking to a friend. Make a habit not to let specials influence your behaviour as there is no such thing as missing out on anything. Furthermore, you may have a separate bank account that don't charge a fee for online spending and automatically deposit a portion of your income into that account to manage impulsive spending and online spending in general. Decision making also requires talking through the process, so talk to a family member or friend to discuss your strategy as that can help with reflection and improving your capacity to decide rationally. Becoming financially independent can be challenging as well as rewarding when you see the progress you are making. Staying on track can be equally challenging as you may have a budget that may seem challenging at the start, such as being encouraged to eat at restaurants more than your budget allows because your friends are doing it. You need to talk to your friends about your goals so they will understand and help you along your journey. You can't always do it alone. If you are in a relationship talk about your goals so you both are on the same page.
If you feel discouraged and disheartened as your money goals feel too complicated and you don't like your new lifestyle, remember the end goal. You may find a vison board helpful to remind you of your end goal. Consider the internal and external motivation. Going off track can feel right and good for the moment but terrible later on. Refocus and get back on track. Remember the why, what was challenging, work on the challenges and then refocus. It is normal to go off track as your new journey is a learning experience but can be a rewarding one. If you are doing something new such as investing in shares, bonds, self-managed super fund or real-estate learn something new about to topic to reignite your motivation to remain on track. Talk to people about what you are doing (only those who understand and can support you as some people are not on the same journey and may discourage you) which can help improve motivation and develop your thoughts around your goals. Staying on track and focusing on your goals is a work in progress. Sometimes we need to go off track to learn something new, so take the learning out of it. Going off track may mean you need to experience what you don't want so you can focus on what you do want. Going off track can be the motivator you need to stay on track so appreciate every step you take and keep reviewing your journey. The psychology of risk involves staying with uncertainty, managing your emotions and not making decisions based on how you feel. Risk involves making a decision when you don't know what to do and not being certain of the outcome. The higher level of risk, the higher level of anxiety and the higher level of loss or gains involved.
Risk is easier when we have real information that we can analyse but when under uncertain conditions such as analysing the economy where past success does not determine future success and there are may variables that can influence outcome, risk can be influenced by your own biases. When uncertain, we can fall under the illusory pattern recognition where we see patterns that are not there. For example, where there is a pattern with eclipses and the stock market and the consumption of alcohol and the economy. While there are many investors that work hard to analyse the data, most of the market is random. Past success can create and illusion of control and increase risk taking. People who have an illusion of control and take more risks are more likely to fail to see the limits of their abilities and make poor investment outcomes while blaming external sources instead of their own limitations. Most successful traders won't take a risk when there is a lot of uncertainty but will stay with their stocks while there is volatility. Their choice is to do nothing when they don't know what to do. They will manage their emotions and allow the market to ride the ups and downs, while other people will make decisions based on their emotions which is usually driven by media hype. During volatility your best strategy may be to manage your emotions while not acting. It is important to understand the market, learn about strategy and how to you manage your own behaviour including emotions when trading. This also goes for managing money in general including learning how to stick to your budget, your relationship and managing emotions when buying or selling property and how your relationship to money is affecting your relationships to others. One way people will manage their emotions including anxiety is to predict the future, which is another fallacy. The psychology of risk involves understanding your risk tolerance and if you have a low tolerance for risk and there is high volatility in the market, then you may decide to consider not acting as your emotions will override rational decision making. Listening to your emotions is important but sometimes we need to step back and reflect before acting. Disclaimer: The information provided above is not financial advice but intended for general information only. If you need help with improving your financial literacy and support to improve your financial behaviour and mental health, contact us today. For specific financial advice you can reach out to a financial planner. The financial planning industry has gone through a large volume of change which has resulted in distress within financial planners. Change has included increased legislation, higher education standards and change in how fees are paid. While it is there to improve client outcomes, it may have also increased fees from increased workload of the planner. However, adapting and resilience is required to cope with the change as well as the strength to seek help when needed. How would you know that you need support? What signs are there? Signs may include feeling overwhelmed, lack of sleep, anxiety, overinvolved with thoughts of the past, what is not working, wishing things were different and being edgy and irritated with self and others. Suicide rates after the Hayne Royal Commission has increased due to overwhelming changes that would have affected the planners livelihood.
Mental resilience is a term that is not easily taught through education but learned during challenges, but when you understand the concept you can apply them when you are going through any form of hardship including a change in organisational structure and government reforms. Mental resilience is working through the challenge and coming through okay. Your worldview may have changed but it won't be negative. Mental resilience includes structuring your day and ticking off what you need to do for the day so you won't feel overwhelmed, using planning tools such as a Gannt chart so your project is managed well, seeking support whenever you need it, and starting a peer support group to talk about how others are coping and what is challenging so you won't feel alone. It also includes eating, sleeping and exercising well, other self-care activities such as yoga, mediation, watching or listening to comedy, going for nature walks and having hope that you will get through. Often spirituality helps so you won't feel alone and trust that life will work out for the best while you are spiritually supported. Resilience may also include being a voice for the industry, but working collaboratively with others as often beliefs can differ as to what is right and wrong such as accepting commission and fee for service only practices. Arguing these differences rather accepting them may cause more stress, so pick your battles to cope. Resilience also means leaving the industry if nothing else you could do to make it work or that the change will impact on your personal life. Leaving the industry doesn't mean giving up but is another way to cope. Remember that when you have more stress, you need coping strategies to increase your personal wellbeing program. Don't ride the stress without one or else you will end up in burnout. Signs of burnout include hating our job, seeing others as the problem, fatigue and negativity. If you are seeking a single session support from thoughts of suicide, depression and anxiety reach out to Lifeline on 13 11 14 or Beyond Blue 1300 22 4636. The Financial Planning Association offers an Employee Assistance Program for its members. Take advantage of the support available to cope with the change and the challenge and remember you can get through. Budgeting is often considered the same as a diet, as both consist of avoiding having the things you enjoy and cutting out items you want in life. This can be difficult when you enjoy your lifestyle and struggle with the thought of living with less. However usually with budgeting, you would consider it when life is financially challenging and you are looking for ways to cope. Budgeting should not be a reactive process but proactive and one to be practiced all the time.
To build wealth you would have to reduce expenses and increase income as well as make your money work for you through compounding. Budgeting is a part of this process, where you are monitoring your money so you will make sure that a certain percentage is placed for wealth building and you have a healthy cashflow to pay expenses, have money to invest and money for emergencies. How do you maintain the momentum to keep managing your money so you can maintain a healthy cashflow? Budgeting is structure. Structure is a normal part of life such as keeping your calendar working for you. As your calendar will help create structure so will budgeting. There are many strategies for budgeting such as the zero budgeting where there is no money left and every cent is for a purpose including in an emergency account, and there are many with percentage such as 50/30/20 percent where 50% is for needs, 30% is for savings, investments including retirement and emergency fund and 20% is for you. You can tweak the percentages to suit you. Another strategy is paying your small debts first so you feel successful in money management and then pay the bigger ones as you go, which is called snowballing. The strategy will depend in how you think, your momentum and past history. If you have a history of struggles you may lack momentum and belief that you can do it. Below is a list of cognitive bias that with awareness can help you stick to your budget and improve performance. Decision making Think of the way you make decisions and how to maintain self-control. You would need to wait for things and delay gratification when managing money. Delaying gratification is exercising a part of your brain that would take getting used to. It may be learning to ride the wave of urges and other unhelpful emotions that may cause you to spend on items you could live without. Create a positive reinforcement when waiting to enjoy your wealth. When you have maintained your budget, reward yourself with an activity that is within your budget and enjoyable. Decide on an amount you would reward yourself each week and enjoy staying in the black. For example, you may decide to save $100 per week and reward yourself for 1 hour every Friday night pampering yourself. Shift perspective Instead of focusing on the budget think about the cashflow coming in and building your wealth. Cashflow is king and the thought can be the driving force in changing your habit. Additionally focus on living the best life possible with what you have. Feel grateful for what you have and reward your achievements. Another perspective to shift is to realise that most people who have fancy cars and live an expensive lifestyle also have a mountain of bad debts. Bad debts are ones you can do without and where the assets depreciate. Good debts are ones where your assets appreciate. Money management can be a fun and rewarding experience because with enough financial literacy and support you can navigate the world a lot better, learn how to support yourself financially, become more independent and cope with life challenges such as leaving domestic violence or inflation. Disclaimer: The information provided above is not financial advice but intended for general information only. If you need help with improving your financial literacy and support to improve your financial behaviour and mental health, contact us today. For specific financial advice you can reach out to a financial planner. Do you have the financial resilience to cope with the high inflation rates? Do you have enough financial capability to cope with the changes? High inflation rate is a stage in life that we don't always think about. It is life uncertainty that requires reviewing your finances and coping emotionally. It is helpful to prepare rather than react and this can be a life lesson for the future. Often people are just surviving living pay cheque to pay cheque and believe they don't have enough savings to cope with the increased costs of living. Often the belief can be true but finding ways to increase income and reduce spending can help. Saving 10% of your income to pay yourself first and having an emergency fund is a helpful strategy to cope with this challenge. However emotional resilience and the ability to cope with distress can be helpful if you are feeling the financial pressure. On the other hand knowing the financial strategies to help you pull through will also help. This may include finding a side hustle, asking for a raise, cutting down incidental costs you can live without for a while, asking adult children to help financially by paying board money to teach them life skills and looking for government incentives and comparing utility bills can help such as electricity bills to find cheaper options. Often changing insurance companies will also help as many will provide discounts so you can become their customer. Emotional resilience is thinking differently to help cope. For example, you may decide on what you can do to manage the situation such as the strategies I provided above, seek help from a financial counsellor or advisor or review your budget. Financial counsellors can help advocate for you when in debt and financial advisors can help with reviewing your current situation and planning for the future. Financial counselling is reactive while financial advisors are proactive. Financial therapy involves mental health counselling and financial literacy to help cope with the distress and learn strategies to cope. Think about how you can cope rather than not coping, stay positive and hopeful, and write down a list of financial strategies to improve your situation. Coping with distress is also helpful. Distress is not an easy emotion to sit with as it can be uncomfortable but I'm sure most of you have hopefully learned that strategy with the uncertainties Covid-19 created. Body scanning where you focus on the emotion in your body and sit with it as well as mindfulness. Mindfulness is about being aware of your feelings and thoughts but gently shifting your awareness to your senses such as what you hear, see, touch, taste and smell. Mindfulness can be a way of life rather than a strategy and a practice that is helpful for everyone everyday. Find your own way to cope with distress and review your finances to manage these hard times and before you know it, you will adjust and life get easier to manage. Disclaimer:
The information provided above is not financial advice but intended for general information only. If you need help with improving your financial literacy and support to improve your financial behaviour and mental health, contact us today. For specific financial advice you can reach out to a financial planner. There are many reasons why people buy which may include being seduced by marketing strategies, wanting to be part of a community which is usually encouraged through social media and programs, to increase points to have something else you want or to manage emotions which can also be called retail therapy .
Understanding why people spend money can help manage the spending habits, which is especially helpful at a time during high inflation. Below are a few reasons why people buy: Cognitive bias - not thinking rationally when spending so checking in with your thoughts can be helpful. Questions to ask yourself may include: what emotions are driving my thoughts? Do I really need this or do I just want it? What will my life be like if I didn't buy this item? Can I wait and delay gratification? Encouraged by price - thinking this is a bargain and you don't want to miss out. Bargains can create an emotion that will influence your spending behaviour and create the fear of missing out. Wanting to be part of a group through satisfaction of the ownership of product - re-evaluate the meaning of the group and if you can get that satisfaction elsewhere. Is the group superficial and really healthy for you? Marketing tactics can include having your sensory needs met such as the right music, smell and feeling the product as you want to buy it (such as a cold drink from fridge), a shopping basket at the front of the store so you can spend more by filling it up and advertising that creates an expectation which is not real but makes you believe in it through the cognitive bias of expectancy. Compulsive buying otherwise known as impulsive spending is a behaviour that can be influenced by mental health, personality and adverse childhood experiences. People may spend impulsively because they feel it is comforting and distracted from negative experiences. It can be considered similar to binge eating, where food is used to comfort.
Impulsive spending occurs when the person spends spontaneously, struggles to manage their thoughts including behavioural biases and emotions and is seduced by marketing including social media. Impulsive spending is usually not planned, sudden without the consideration of consequences. The benefits is usually temporary with feelings of guilt and regret afterwards. The person does not need the item but wants to have it without considering the negative consequences. Positive consequences for impulsive spending behaviour may include a high feeling, comfort, improved identity and improved mood. While impulsive spending can have positive consequences they are short lives and overcome with negative consequences that can be damaging and lasting. Negative consequences include problems with relationships, financial hardship, negative effects on mental health and low self-esteem. However, the consequences may not be fully acknowledged as the thoughts of spending is pervasive. Impulsive spending is an external coping strategy. Therefore internal locus of control can manage the behaviour. Cognitive behaviour therapy, and acceptance commitment therapy are treatment options available. Thinking about long-term goals, distress tolerance, reviewing your relationship with money, healing from childhood adversity, and reflecting on what you want to buy can help with impulsive spending. Financial literacy and reviewing your budget can also help improve money management and spending behaviour. Moreover, healthier coping strategies can also alleviate spending behaviour. While these strategies sound easy, it can be challenging for the person to manage the behaviour, however with time, support, trust and patience it can be done. |
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