So you say you’re committed to making this the year that you'll be working toward a new-and-improved you.
You've pledged to stop inhaling gelato by the pint, and you'll hit the elliptical three times — a week.
Another important improvement to consider tacking onto your list? Adopting a wiser approach to handling your money. After all, your finances can affect virtually every decision you’ll make both now and for the rest of your life.
An overwhelming thought, right?
But it doesn't have to be. In fact, once you understand how your thoughts and emotions can influence the money decisions you make every day, you can find ways to help circumvent the bad impulses that could threaten your progress.
So we picked the brains of behavioral economists and financial advisers to learn more about what unknowing factors tend to inform our money attitudes — and how to help kick-start better financial decisions today.
Kick-start Tip #1: Take "Luck" Out of the Financial Equation
In the span of one week, you get offered your dream job, and the salary is more than you expected. Then you spot a great deal on that fancy gadget you’ve been eyeing — and find a dollar on the sidewalk on your way home from work.
Feeling like luck is on your side can be a big-time confidence booster — but it can also cloud your judgment and lead to big financial consequences if you aren’t careful.
Case in point: A 1988 Ohio University study found that whenever Ohio State's football team won a game, local lottery ticket sales surged. Surely, those gridiron fans knew the odds of hitting the winning numbers were astronomical, but the exhilaration of victory on the field made them feel as though they could triumph over anything.
Of course, we’re not suggesting a splurge of a few dollars will negatively affect your bottom line. But jumping into a bigger decision — like, say, scooping up that fixer-upper property that you’re sure you can flip for a profit — because you’re on a lucky hot streak, certainly can.
So what's the best way to keep such magical thinking from clouding your judgment?
David Just, a professor of behavioral economics at Cornell University, says it's as simple as promising to give yourself one to seven days to think things through — and thoroughly research the pros and cons of that big money decision to help ensure you’re not just acting out of a misguided, “can’t-lose” sentiment.
You could be trapped in what Klontz calls the financial comfort zone. “The more certainty you have,” he says, “the more likely you are to harm yourself.”
Kick-start Tip #2: Feed Your Appetite for Learning
Once you've started to implement better money habits, it can be easy to slip into the mind-set that you've learned everything there is to know about your finances.
But this attitude can hinder you from exploring more opportunities to grow — both your bank account balance and your know-how.
If this sounds familiar, you could be trapped in what Brad Klontz, CFP®, coauthor of "Mind Over Money: Overcoming the Money Disorders That Threaten Our Financial Health," calls the financial comfort zone — and that’s a potentially problematic place to be. “The more certainty you have about [your money],” he says, “the more likely you are to harm yourself.”
To help get out of that zone, consider brainstorming new ways to continue increasing your knowledge — be it devouring the top new money reads or listening to an informative podcast — as well as better your financial status.
One easy way to do this is to perform a quarterly credit check, and then read up on smart strategies to boost your score — moves that will help set you up to tackle such future financial goals as purchasing a new car or launching your own business.
Kick-start Tip #3: Rethink That “Keeping Up With the Joneses” Mentality
You know that feeling when your neighbor’s gleaming luxury ride pulls up next to your perfectly operational but circa-2003 economy car with 140,000 miles on it?
It’s not simply a desire to have what your friend has — it’s what behavioral economists call “image motivation,” or the desire to be seen as successful by others.
On a basic level, there's nothing wrong with this — unless it encourages you to spend beyond your means. Plus, just because someone owns it doesn’t mean they can afford it.
“I suggest to clients that they hang up a picture of what the Jones estate really looks like,” says Sarah Maskill, CFP®, founder of Financial Answers LLC in Somers, Connecticut. “A fabulous mansion built in 1853 inspired the phrase, and it's now crumbling and in total disarray.”
Indeed, the house in Rhinebeck, New York, ended up with a succession of owners who couldn’t afford to maintain it — and has been abandoned for decades.
So take the storied home’s fate to heart and use your desire for prestige as fuel to aid you in making solid financial decisions.
Dan Ariely, a Duke University psychology and economic behavior professor, suggests funneling the money you would have spent on a fancy set of wheels into a college savings plan instead. Having well-educated, high-achieving children — whether your own or other kids within the family — can be a great source of pride for you and them.
The added bonus? “Research shows that when parents open college funds for their kids,” Ariely says, "the children are more likely to do well in school.”
Talk about a win-win.
“People don’t like to close out an account on a negative note. But overcoming the fear to sell can be the difference between cutting your losses—and losing everything.”
Kick-start Tip #4: Learn When to Walk Away
No one likes to admit that they’ve made a misstep — or that a past financial decision didn’t quite pan out.
This helps to explain why, even though investors feel comfortable selling a stock at a profit, many bristle at the idea of unloading shares of a company that’s sinking. Instead, they cling to the idea that the stock will eventually regain its value, even when all reasonable indicators suggest otherwise.
Hersh Shefrin, a behavioral finance professor at Santa Clara University, identifies this phenomenon as the disposition effect, or the tendency to “ride losers too long.”
“People don’t like to close out an account on a negative note. They think they must break even,” Just says. “But overcoming the fear to sell can be the difference between cutting your losses — and losing everything.”
So give yourself a reality check. “You have to come to terms with the fact that the stock is priced at what it is — not what it used to be,” says Klontz.
And remind yourself that the benefits to selling are twofold. Not only will you salvage the cash you're losing, but realizing short-term losses may also help you offset other capital gains for a tax break, Shefrin says.
This doesn't just apply to investments, either. Maybe you’re a homeowner who wants to sell — but can’t bring yourself to take anything less than what you've (emotionally) deemed the perfect offer.
The same "get-real" advice applies: Talk to your real estate agent, review the sale prices of other homes in your neighborhood — and realize that turning the page can give you the mental freedom to move on to bigger and better uses for your money.
Kick-start Tip #5: Stop Chasing Short-Term Highs
Learning to appreciate long-term value over instant gratification is a pillar of good money management — especially when it comes to using credit cards responsibly or staying on track with your retirement strategy.
The only problem? We’re wired to crave those short-term wins.
When a smart money move pays off — for example, you sell a stock and net a hefty gain — neurotransmitters are released in our brains, producing an emotional high that leaves us wanting more, says Shefrin.
The danger comes into play when chasing this feel-good emotion trumps your better judgment — in this case, tempting you to sell additional stock, even if it would be better to keep it a while longer.
So the next time you’re craving a neurotransmitter high, Just suggests setting up an obstacle for yourself that will help you better vet the idea, such as making it a joint decision by talking to your spouse or a financial adviser first.
A second party can not only bring you back down to earth, but can also help you model out different outcomes — like how much money you may be able to earn if you keep your investment in the market another five years.
Still after that neuro buzz? “Carve out a small portion of your portfolio that you can play with in order to gratify your need to tinker and feel the neurotransmitter rush,” Shefrin says. “This way you won’t endanger your portfolio as a whole.”
“The overwhelming majority of people only think about their money when they’re forced to at tax time. But don’t wait until April 15. Assess your finances at New Year’s too.”
Kick-start Tip #6: Shake Up the Financial Status Quo
A reluctance to cut your losses is one thing — but have you ever felt resistant to any kind of financial change?
Maybe you don’t want to redo your budget, cut out an unnecessary expense, or find a new credit card that might offer better perks.
This behavior is actually pretty normal, and behavioral economists classify it as the status quo bias. But while you may not want to upset your emotional apple cart for fear of regret, sometimes it's in your best interest to do so — in baby steps.
Know you should really kill that gym membership you never use, but keep paying for it anyway because you figure one day you’ll be motivated to go? Instead of canceling your membership outright, start small by freezing your account for one month.
Not only are incremental steps less likely to trigger your worry of regret, but they allow you to assess your feelings as you go. So if after a month you prefer to revert to the way things were, there’s no harm done — although you may just find that making smart and calculated changes isn't so scary after all.
As for big-picture adjustments — like rejiggering your retirement plan or assessing your savings progress — Just recommends picking strategic times of the year to analyze your money strategies.
“The overwhelming majority of people only think about their money when they’re forced to at tax time,” Just says. “But don’t wait until April 15. Assess your finances at New Year’s too.”
This way you can channel the fresh-start mentality you feel now and kick-start financial change to help set you up to make progress throughout the year.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.