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Improve Your Finances By Modifying Your Behavior

Improving your financial situation requires more than just trying harder. People who write financial websites offering advice often think or imply that the reason for financial misfortune is ignorance of the basics. Recently, there was one website that claimed that the only thing people need to know was spend less than you earn, as if taking this to heart is the single solution to getting your finances on the right track.

There is no switch that you can just turn on, for the most part. In some cases, particularly where someone experiences a major emotional setback — “hits rock bottom” — changing your direction in place works, but that could mean losing a house or destroying a family relationship. A devastating situation isn’t guaranteed for everyone and you may not want to wait until you reach such a low point.

MoneyIf you’ve been living in debt for the entirety of your adult life, you may have an epiphany of some sort and turn yourself around with just the knowledge that your net worth needs to increase at the end of each month in order to become financially independent, but for most people, changing behavior takes much more than desire.

There are certain things you can do to help yourself — and your brain — accept that you need to start improving your financial situations for the sake of your future self and family.

Replace old habits with new habits

Much behavior can be reduced to patterns and habits. Breaking a habit, like emotional spending, can be incredibly difficult because of the comfort that has developed through years of participating in the activity. Shoppers who derive pleasure from spending money may be in uncontrollable debt, and use shopping in difficult times to feel better. Of course, with more shopping and spending more money than is available, this person could experience emotionally difficult situations due to the lack of finances, yet still seek to cure those negative feelings by shopping.

Replace the reaction of shopping with something that makes you feel better without damaging your personal finances. Exercising releases chemicals in the brain that, for many people, enable happy feelings, so one of the best options for replacing a bad financial habit is exercise. Whenever you feel the urge to do something that you know is harmful to your finances, choose to run around the block or work out in a gym.

It might be difficult to make this change at first, but the goal is to make a new habit that can be triggered in place of your old habit. For some time, you may want to overlap both reactions, but after several weeks of consciously using your new habit, you should be able to successfully replace the old.

Resist temptation by making it difficult or inconvenient

Some financial advisers and gurus suggest freezing your credit card in ice or keeping your emergency fund at a bank that’s difficult to access. The more barriers you can place between yourself and your bad financial behaviors (in this case, using your credit card or dipping into your emergency fund), the more success you’ll have in avoiding these temptations.

Combining barriers with habits can be successful, too. Rather than purchasing items from Amazon on impulse, create a habit of waiting 24 hours between your desire and your action. This barrier of time gives you the opportunity to re-evaluate your decision. Twenty-four hours later, you may be in a different mood and decide that you don’t need the item you intended to purchase as bad as you thought you did.

Remove barriers to good financial behavior

While you’re adding barriers to prevent bad financial behavior, you may want to think about whether you already have barriers preventing you from making good financial decisions. Although the stock market has been on a rally lately, medium-term performance has not been great, and the investing industry has attracted a bad reputation through and following the recession and credit crunch. The fear of losing money may be preventing young people from investing in the stock market.

Many investment advisers say that you should evaluate your risk and only invest in a way that makes you comfortable with your possible losses, but an investor’s level of risk aversion could be tied to his or her feelings about the stock market. Risk profile measured this way would then fluctuate. One possible outcome from feeling good about the stock market and willing to take on risk during times of confidence about Wall Street while feeling nervous when the media is taking the financial industry to task is the unprofitable accidental strategy of buying high and selling low.

If you’re young and would like to save for retirement, with a goal of leaving your work behind one day with enough money to pay your expenses, you can’t ignore the stock market. A diversified portfolio may not make you rich over time, but there’s a good chance you’ll be able to retire.

Change your words

The words you choose to describe your financial behaviors will have an effect on your approach to your money. For example, take “investment” and “expense.” I mentioned this phenomenon in my editor’s note after Jennifer Calonia’s article about wedding planning and spending.

One way people often justify or rationalize expenses is by calling them “investments.” For example, one might say, “Spending a large amount of money for a wedding is an investment in your relationship.” Someone else might say, “Going to a private university is an investment in your future.” You should only invest in something when you receive an asset in return, and you are planning for the value of that asset to increase over time.

You may be able to argue that the asset you receive in return for a wedding is a partner who stays with you for the rest of your life. You may receive an emotional asset in return. But in order to be truthful with yourself, consider whether you’re using the term “investment” to justify paying more for a ceremony than you need to. As I’ve written previously, spending money for once-in-a-lifetime event is not a bad way to spend money if you can afford it, but calling it an investment is just a way for you to feel better about your resulting lack of money.

In return for your expense for your college-level education, you may receive assets: your ability to earn an increased income over time when compared with someone with just a high school diploma, possibly, cognitive skills that help you succeed in the world regardless of your job, career, or income, and, possibly, connections that you retain for the rest of your life, helping you with career moves and friendships. The values of these things may increase over time, making the term “investment” more legitimate. The trouble appears when you pay a higher price for education than necessary, calling it an investment.

If you ask anyone who has any experience with finance, a house is an asset and a mortgage is a liability. Yet, some financial gurus continue to insist that a house is a liability. This doesn’t make any sense from a purely financial perspective, but if you look at the connotations of the words instead of the meanings — or if you look at the broader sense of “liability” rather than its financial sense — these gurus might have an argument. A house that does not create cash flow for you (that is, a house that is not an investment with rental income) should be avoided as much as possible. Anything that costs you money is a liability in the sense that is drags your finances down. Although it’s not financially accurate, considering bad assets “liabilities” encourages you to eliminate as many of these as possible and to replace them with income-producing assets.

Politicians and activists use word choice to influence their constituents’ opinions all the time. That’s why we have terms like “pro-life” and “American Recovery and Reinvestment Act.” It’s a form of manipulation, but if you’re using this technique to benefit your financial situation, no one can blame you for misdirection.

Using these tricks — replacing old habits with new habits, adding barriers to bad behaviors, removing barriers to good choices, and changing the words to describe what you do — can help you overcome the difficulty of putting what you know about “spending less than you earn” into effect. There’s a bridge between knowledge and action, and unfortunately, many people mistakenly think that the reason so many people in the United States are suffering financially is due to lack of knowledge. The prescribe solutions like money management class in high school and other financial literacy initiatives. Having more information is not going to solve financial illiteracy. On an individual or family level, taking steps to modify behavior will certainly move finances in the right direction.


Updated February 24, 2012 and originally published February 22, 2012.

About the author

Luke Landes is the founder of shizennougyou. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 11 comments… read them below or add one }

avatar 1 Anonymous

I think you hit the nail on the head when you said “there’s a bridge between knowledge and action”. That’s really it, people “know” they should take better care of their finances but they don’t always take action. Knowledge is not power, knowledge + action = power.

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avatar 2 shellye

Amen. There are lots of people who work in the financial world who “know better” that they should take better care of their finances, but don’t.

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avatar 3 Ceecee

Sometimes you have to challenge your standard beliefs. Maybe you grew up in a household that only used brand names. Or always had cable tv. We accept certain things as necessities that really aren’t. If in debt, you have to take a hard look at everything.

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avatar 4 Anonymous

Love this post! This year, it has really hit home to me how much my mindset positively or negatively influences my finances.

Each day, I have choices to make on how I live my life, what I value, and what I do with my money. I have to keep reminding myself of my goals – even when they seem so long-term or impossible. As a reformed shopper, for instance, I now avoid malls and online shops, lest I give into temptation.

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avatar 5 Donna Freedman

Substance abusers need to avoid that which tempts them, after all. That means not just the substances themselves, but the people/situations/lifestyle that went along with those substances.
You’re wise to avoid malls and online retailers. If you used to shop with friends, I hope you can find something new (and fun) to do together.

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avatar 6 Donna Freedman

“Spend less than you earn” is good advice but I agree with you, Flexo, that it isn’t that easy. Few things are, or we’d all be thin non-smokers with big retirement accounts. We’d also give to charity and call our moms every weekend.
For some people it isn’t just developing new habits, it’s learning this all from the ground up. If you’ve never seen someone balance a checkbook or save for a big purchase, you might not figure it out on your own.

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avatar 7 qixx

i’m glad you included change your words. There is a much closer correlation between the words people use; the thoughts they have and the actions they take; than most people give credit for. Words influence thoughts and thoughts influence actions.

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avatar 8 Anonymous

Saving is like weight loss – there’s no pill that will help you do it, you have to be ready and pull yourself out of denial of your situation. It can also be hard to maintain. If this weren’t true, everyone would save money.

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avatar 9 Anonymous

I don’t know if some people even realize they are spending more than they earn. I agree that it often takes a scary event (like a call from a collection agency) for people to wake up and start changing their spending habits and bad financial behaviours.

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avatar 10 Anonymous

Hi, I couldn’t agree more. Basic advice is great but if you consistently fall into bad habits, then you need to change your habits. Just like quitting to smoke, easy said not easily done. There is also an educational issue. Schools and colleges are generally very poor when it comes to personal financial advice but supply terrific courses for marketing. These courses are designed to help you sell anything and everything to the poor unsuspecting public. it’s a war out there for your hard earned dollar and education will be the best asset for defence and attack.


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avatar 11 Anonymous

This is one of the best posts regarding financial behavior modification. Great Action steps to get people to change bad behaviors into good ones.

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