You might be wondering how finances and behavior are related. Finances appear to be fairly simple, right? You get paid. You make purchases. You cut costs. How difficult can it be? However, it turns out that finances are much more complex than first appears.
Our actions, both those we choose consciously and those we might not even be aware of, have a direct impact on how we manage our finances.
Personal finance isn’t something we were born with the knowledge to immediately understand.
Have you ever thought about where your financial journey started?
Were there any key moments that helped shape the way you handle money today?
We’re digging deep today. And by deep, I mean into the core of what defines us as individuals about money. We’ll examine how various actions affect our financial situation and what we can do to change it for the better.
What’s intriguing is that there are certain behaviors you can start putting into practice right immediately, even if you’ve never learned about money or personal affairs. This will lead to better self-awareness and better financial decisions.
What is Personal Finance Dependent On?
There are a few key things that personal finance is dependent on.
Income
This is the money coming in each month that you use to cover your expenses. Your take-home pay from your job is your primary income, but you may also have other sources of income, such as interest from investments or mutual funds, child support, or alimony payments.
Your Expenses
These are the bills, debts, and other costs that you have to pay each month. Impulsive purchases, like that new shirt you just had to have, are also considered expenses as well.
Your Savings
This is the money you put away each month in your bank account to cover future expenses or emergencies. Financial experts recommend saving at least 10-15% of your income each month for your financial future.
Your Credit Score
This number, which ranges from 300-850, is what lenders use to determine whether or not you’re a good candidate for a loan. If you have a high credit score, you’ll likely qualify for lower interest rates and better terms on loans.
The Fundamentals of Personal Finance
Personal finance largely refers to how an individual or family manages their financial resources. It includes techniques for handling money through spending, saving money, and investing while taking a variety of risks and events into account.
Other areas of personal finance include:
- Banking
- Insurance
- Retirement planning
- Budgeting
The phrase also refers to the different financial organizations that provide financial services to a person during their lifetime.
Fulfilling an individual’s long-term goals and short-term financial goals is a primary focus of personal finance. Personal finance includes anything from having enough money to pay one’s essential monthly expenses to making retirement plans.
Why is Personal Finance Dependent Upon Your Behavior?
People who start saving early on amass enough cash to enjoy later in life and easily weather bad economic times. They don’t have to rely on only social security to only fund their retirement. Even a small amount saved each day can pile up over time, and individuals who consistently save money benefit from it and even build wealth.
The following justifies the requirement for financial management:
Aids in Spending, Saving, and Budgeting
If there is no financial strategy in place to wisely use that income, we could be living in significant debt even after earning a sizable amount each month. This is due to the possibility that we may wind up spending more than we make or can afford, sometimes without even realizing it.
However, a person with a middle-line wage can lead a more secure financial life. This is a result of their financial planning, saving, smart choices, and living below their means. Understanding our income and monthly costs and how to set budgetary guidelines are all things that personal finance teaches us.
Security Needs and Meets Financial
Money-related difficulties extend well beyond what we often consider. We must see our finances from a wider angle so that we may think about more than just going to work and making money. Spending should not occur immediately after earning money.
Instead, we should have a strategy in place to manage money for calculating our expenses, income, and financial objectives. By doing so, we will establish our financial habits and stability, all the while meeting our needs as necessary.
Expands Our Assets
As a sort of financial security, many people choose to possess assets rather than rely on others for assistance. However, several assets also have some liabilities. This requires having a sufficient understanding of our financial situation.
Understanding our finances allows us to identify the true worth of a specific asset and to know how to settle or eliminate liabilities. We can efficiently grow our assets in this way.
Aids In Increasing Cash Flow
By managing personal finance, our cash flow will improve in our life. This can be done by monitoring spending and avoiding unnecessary material possessions. By preparing our annual taxes, budgeting income carefully, and making the best financial decisions, we can achieve our goals.
Avoids Unmanageable Debt
Overspending on debt puts our future financial stability in grave jeopardy. Personal finance knowledge teaches us how to control our debt. Staying out of debt can be achieved by avoiding expenditures.
For instance, some people tend to alter their lifestyles as they start making more and spending money. This merely results in accruing more debt. Credit card overuse might also increase our debt load. Personal finances are crucial because of this.
Personal Finance Education and Personal Finance Principles
Here is some personal finance advice to get you started on the right foot:
Avoiding the Lifestyle Inflation Trap
Some of you are already rolling your eyes at me. If you know me, you are aware of how frequently I bring up lifestyle inflation and how it can swiftly put a doctor’s aspirations to rest.
You might not be familiar with what lifestyle inflation implies because you’re new to Financial Residency. In either case, I want you to comprehend how this habit has a detrimental effect on your finances.
Lifestyle Inflation Explained
Simply put, lifestyle inflation is the propensity for people to spend more as their income rises. The increase in income goes toward more frivolous items rather than financial objectives like retirement, paying off student loans, or paying off a mortgage.
The slogan we are all familiar with, “Keeping up with the Joneses,” is a perfect example of lifestyle inflation. If the Joneses next door just bought a new home theater system, we might feel inclined to buy one as well.
These frivolous purchases may be extravagant vacations, high-end pastimes, automobiles, or second residences.
We’re not arguing that you can’t have beautiful things in your life or aspirational goals, though. However, we advise that you maintain a balance in your funds to prevent lifestyle inflation. To reach your financial objectives, you must have a plan that you are following. You are not disregarding prudence. Come up with an emergency fund and realize certain decisions might put you back a few months.
Medical Care and Lifestyle Costs
Particularly susceptible to the trappings of lifestyle inflation are doctors. Sincerity tells me that I understand how simple it would be to develop this pattern of conduct.
You spent years in undergraduate and medical school wearing hand-me-downs and living on as little money as you could. You then enroll in the residency program of your choice, pack up your possessions, and move to the location specified, only to find out that your salary is considerably less than that of a doctor.
The mindset of “I deserve this” and “I’ve worked hard for my money” is what fuels lifestyle inflation. You indeed put a lot of effort into your medical career. It’s crucial to understand that, at some time, you must stop letting money dictate your decisions and begin directing them.
Actual behavior is lifestyle inflation. It affects your finances in the same way regardless of what you call it, which is why you may see it referred to by numerous names and euphemisms. As long as you continue to act in this way, you will never be able to reach the major financial milestones.
Correcting Lifestyle Inflation Through Education
One of the best things about lifestyle inflation is that, with a little effort, it is simple to reverse. Don’t panic if you have already admitted to falling into this trap. We can take action to assist you in eradicating lifestyle inflation and beginning to realize important financial goals. You can start changing this behavior right now. Embrace frugal living strategies, and your future self will thank you.
You Should Give Yourself A 50% Raise
I help many residents, doctors, and their spouses develop personal budgets that they can live with as fee-only financial counselors. As I deal with clients, I’ve observed that those who adopt a 50 percent raise as part of their lifestyle as opposed to surviving only on the physician pay are the most successful. I’ll explain.
Most locals earn between $50,000 and $60,000 per year. This can be a good paycheck or barely cover the cost of rent, depending on where in the country you reside. In any case, you develop the ability to adapt and find ways to make do with the meager income you receive.
Budget Management
The idea of a budget is another action that goes hand in hand with improving your financial situation. I don’t imply that you “think about” writing down your budget in an idea. You establish, develop, and employ one, after all! Making use of a budget can help you understand the concept of the 50% raise as well as control your tendency toward lifestyle inflation.
Nothing affects your outcomes more when it comes to behavior and money than adhering to a tried-and-true budget.
You have complete control over the behavior of creating and following a monthly budget for spending money. However, how can you implement this behavior so that it becomes natural and less of a chore?
How To Create A Budget
- Identifying your financial objectives is done by setting a budget.
- Determine the things that make you the happiest.
- Analyze your present financial situation.
Organization
Getting organized and maintaining it is another of those acquired behaviors. It seems that some people find organization considerably simpler than others. However, just because you don’t have the same brain as Marie Kondo doesn’t mean you have to act in an unorganized manner.
Wouldn’t you love to add hours to your week? Benjamin Franklin famously observed, “For every minute spent in arranging, an hour is earned.”
A crucial habit for achieving your financial objectives is organization. It involves more than just labeling a few files and storing them in a filing cabinet. It involves setting up a system for you and your family so that you can access your financial information quickly. If you need help with financial organization, relationship management banking may be a good solution for you.
What are some behaviors you can start practicing right away to assist you in developing an organized behavior? I have the following suggestions for you:
- Integrating your finances with your spouse
- Make a comprehensive inventory of all the debts you have.
- Make concessions to reduce your monthly expenses.
- Set up sinking funds to save for your particular objectives.
- Choose the professional services you’ll employ.
- Put money into your retirement accounts.
- Stay informed about your finances by using financial applications.
Increasing Emotional Quotient
Being a Certified Life Planner, in addition to being a fee-only financial advisor, places me in a special position. In addition to their financial goals, I assist my customers in focusing on the success of their personal goals and objectives. Money isn’t everything in life, but it does assist when you can utilize it to support your aspirations.
Due to my dual role, I have been able to see how our emotional intelligence may significantly affect our lives and finances. You might be interested in learning more about emotional intelligence and how it relates to behavior and money.
Definition of Emotional Intelligence
Two elements make up emotional intelligence. It begins with your capacity for emotional processing. Both of these are examples of emotions—yours and other people’s. Taking these feelings and applying them to guide decision-making is the second element of the equation.
Related Question
What Role Does Personal Finance Play In Your Life?
For managing your finances through planning, spending, and saving, personal finance is crucial. It entails prospective financial hazards, long-term planning of investment opportunities, and the evolution of your financial condition over a lifetime into account.
Why Does Your Behavior Affect Your Personal Finance?
Being able to efficiently budget expenses, earn money, increase retirement savings rates, and make wise investment decisions that will enable a person to achieve their financial objectives are all advantages of personal finance.
