Where to Start with Your Money: Goals and Behaviour
This is the third and final post in our series answering ‘Where do I start?’ when it comes to money. The three posts looked at the question from different perspectives:
Your goals and financial behaviour (this post)
By combining the three articles, you can pick and choose ideas that apply to your specific situation. Perhaps you:
are a recent grad who also landed a new job (discussed in the first article)
are currently a low-income earner spending more than you’re bringing in, with developing assets and a manageable amount of debt (covered in the second article)
haven’t considered your goals for your life and how money can help you get there (included below in addition to other ideas for your goals and behaviour)
Regardless of your unique circumstances, this series is intended to provide direction to get started.
Goals
In an earlier post, we talked about challenges that keep people from getting the most from their money. The first challenge is finding a WHY. It’s important to understand what money means to you and how it can help you live a fulfilling life. Therefore, if you don’t already have a set of priorities for your life, this is likely the best place to start. Your goals can help you prioritize when facing everyday financial trade-off decisions, including:
Should I buy a property or rent?
Should I move to a city with a lower cost of living?
Should I get a part-time job?
Should I invest or pay down debt?
There is an endless list of goals or priorities you may have. I’ve provided several below, with money topics to consider for each:
1. Security
If security is your priority, it’s important to ensure your needs are met with the lowest chance of disruption. Steps you can take to achieve this include:
Start an emergency savings account by setting aside three to six months’ worth of mandatory expenses. This often includes housing, food, contracts that are too costly to get out of early and other major commitments. This will provide a buffer against a temporary decrease in income or significant expense, allowing you to rest easier with peace of mind.
If you’re facing a decision between paying off debt or investing, you may favour paying off debt. The guaranteed return provides greater flexibility if your life circumstances were to change in the future. As with all trade-off decisions, you’ll need to balance the rewards of feeling secure today from lowering your debt with the rewards of feeling secure in the future from having a larger nest egg.
2. Experiences
If your goal for your money is to provide experiences, it’s important to consider the two causes of value from experiences:
The first is the anticipation of the upcoming event. If you’ve planned a trip or have a dinner scheduled with friends, you’ll be excited about the future and likely have more positive energy.
The second benefit is the memories created from the experience. You’ll likely look back on your trip or dinner many times over the following year and potentially for the remainder of your life. These memories provide fulfillment and increase your anticipation for the next event, creating a positive feedback loop.
It’s helpful to maintain a healthy balance between providing anticipation and creating memories. For instance, if you spend most of your money on trips and dinners while you’re younger, you’ll likely need to spend less later in life. This means you’ll have plenty of anticipation early on, but less to look forward to. On the opposite side, if you save everything for later, you’ll have fewer memories to enjoy throughout your life.
Creating a budget can help you find the right blend between current and future spending. It’s often helpful to spread your experiences out over your life to maintain a consistent lifestyle. For the money that you are spending today, a budget also helps you prioritize the experiences that bring you the most value.
3. Freedom
Another common goal for money is to provide freedom. Often this means being financially independent, where you no longer must work a specific job for income. Freedom from needing to earn an income could allow you to focus on other priorities like spending time with family or working on a passion project.
To achieve financial freedom, it’s important to have alternate ways to earn money. This is often called passive income, which could come from:
investments you’ve made in stocks or fixed income
a company you founded, or many more
To reach financial freedom, you’ll need to spend less than you earn and invest for the future. The more you’re able to save, the faster you can achieve freedom.
To help along the way, creating a budget can help you get the most out of your spending today while you save and invest for the future.
Your goals and priorities for your life may change over time. It’s important to occasionally reflect on your current situation, what you know about yourself and what’s most likely to bring you fulfillment in the future. Then once you set goals, it’s important to take intentional steps—including your financial decisions—towards those goals.
Behaviour
Your behaviour is the way you respond to an event, either through action or inaction, whether consciously or subconsciously. These responses develop over time, based on experiences and chemical reactions. While it’s difficult to control your behaviour, especially on a subconscious level, there are steps you can take to understand it and gradually change it if you wish.
1. Emotions
Your emotions and your behaviour are tied together. If you’re afraid of losing money from investing, you’re likely to behave more cautiously and leave your money in a savings account. This behaviour may then lead to anxiety or regret that you’re not doing enough with your money. Therefore, it’s important to understand your emotions when managing your money, how they may impact your behaviour and what you can do about it.
Anxiety
A feeling of anxiety is very common when people think about money. It can be caused for many reasons, including:
feeling like you’re behind your peers on income or savings goals
uncertainty of how to pay off debt or pay for a recent major expense
wondering if you’ll be able to save enough for major life events
challenges talking to your partner about money
Anxiety can carry over into relationships and make it difficult to enjoy your life. It’s important to know that there’s a way out. While it may not feel like it, by learning more about your financial situation, you’ll be able to address the challenges causing you anxiety.
Fear
Fear and many of the emotions below can contribute to anxiety, but they can also be standalone feelings people experience with their money. Two examples of how fear can influence what you do with your money include:
you may avoid investing your money out of fear of losing your savings
you may invest your money out of fear of missing out on gains you see other people making (e.g., bitcoin, marijuana stocks, Canadian housing)
In the first case, investing may not be the right fit for your current situation, and in the second case investing in risky opportunities may be fine for your financial situation. I’m not suggesting you ignore your emotions, but simply understand where they’re coming from, whether they’re reasonable and whether they should be driving your financial decisions.
Guilt
You may feel guilt that you didn’t start saving sooner or aren’t better with money. Guilt can often be good for its motivating qualities, helping you take action to avoid feeling it in the future. However, guilt can also cause people to ignore the problem and avoid thinking about it. You can’t change the past, all you can do is take gradual steps towards the future you want for yourself.
Pressure
Many people, either consciously or subconsciously, feel pressure to spend money on items and experiences to keep up with others. It’s been discussed since at least the 1910s when a daily comic started depicting the life of a family struggling to keep up with their neighbours.
Regret
Like the causes of anxiety and guilt, you may feel regret about a recent purchase you made or that you weren’t able to gain a better understanding of your finances by now. The truth is that we haven’t done a good job of setting people up for success with money in Canada. The great news is that you’re taking steps to learn more about your options and what you can control.
It’s important to understand these emotions and to limit the control they have on your money. You can start by making a list of the emotions you feel when you think about money. Then recall recent purchases and a few major financial decisions you’ve made to see how emotions impacted your choices. You can take steps to remove emotions from financial decisions by:
Waiting to make decisions until after you’ve had time to think through the trade-offs with a calm mind.
Talking about your finances with a friend or family member who has a different experience with money than you.
Meeting with a financial planner to understand how your emotions are impacting your decisions.
Learning more about psychology and how your mind is wired.
2. Habits
Many of our decisions happen out of habit. We decide one day to have a mid-afternoon coffee, and a year later realize we’ve had a mid-afternoon coffee almost every day since. Understanding how you make decisions is important if you want to change those decisions.
One of the most powerful tools for success with money and in life is to master delayed gratification. If you can put off the temptation of short-term rewards in exchange for larger and longer-term rewards, you’ll be more successful in reaching your goals. This is all easier said than done, but the key is to start with small, manageable habits that will create momentum and change your mindset over time.
To help improve your ability to delay gratification, you can:
Set goals for your money to make the future reward of saving more real.
Save a small amount of money each week and increase the amount over time.
Reward yourself along the way for the progress you’re making.
While you develop your ability to resist instant gratification, there are steps you can take with your money to protect yourself:
Deposit your savings into a separate account, potentially at a different financial institution, and place restrictions on withdrawals to limit your temptation.
If you want your money to be more restricted, you can use a Registered Retirement Savings Plan (RRSP) for your retirement savings. There are penalties and taxes for withdrawals that may help discourage you from dipping in early.
Minimize the amount of credit you have access to. It’s difficult to resist temptation if you can simply put a purchase on your credit card or borrow from a line of credit.
If you want to change your habits, I found The Power of Habit by Charles Duhigg very helpful. We discussed this book and several other resources for managing your behaviour previously.
Your individual responses to events add up over time and determine your trajectory through life. While there is much in life that we can’t control, understanding your emotions and habits is a great place to start if you want to change your behaviour. Many of the ideas and steps we discussed will help you, not just with money but also with leading a fulfilling life.
Closing remarks
Between the three articles in this series, I hope to have provided direction beyond the traditional ‘spend less than you earn, invest for the future and protect yourself from the uncertain.’ While these are the keys to financial success for many, you can arrive at each step in different ways and at different times in your life. By considering your goals, emotions and behaviour, you’ll be able to take steps that are specific to your unique situation.
If you enjoyed the material in this series or throughout the website, please consider sharing it with others. Stress caused by financial uncertainty is impacting too many of our friends and family members. As we discussed in a previous post, it’s more and more challenging to cut through the noise of our daily routines. Therefore, a recommendation from a friend or family member can make all the difference.