Research shows that emotional impulses tend to govern most of our decisions – and financial decisions are no different.
One of the biggest money problems facing South Africans today is that we don’t save, and research reveals a number of psychological reasons for this:
- We have too much choice
Economists used to assume that the more choices we had, the better decisions we’d make; but often the opposite is true. There is only so much information your brain can process before it effectively shuts down and prevents decision making. The myriad choices available can be so overwhelming that we don’t know where to begin and we end up doing what’s easiest: spending instead of saving.
- We become stuck in a rut
It’s easier to keep on doing what you’re already doing than to make a change. The effort of filling in forms and dealing with the administration of making an investment (and then having less money to spend) means we are less likely to do so.
- We want instant gratification
We find it difficult to look to the future and understand the value of depriving ourselves of something now for future benefits. This is the main reason people don’t save for retirement.
The good news is you can overcome these barriers.
Follow this 5-step plan for future wealth:
Recognise triggers for spending
Do you really need those strappy sandals or are you rewarding yourself after a stressful day Does your daughter need a new dolls’ house or are you trying to compensate for spending so much time at work Remind yourself that you are acting on emotion, not logic, and that there are ways to cope with emotional stress without spending. Exercise – on your own or with your family – tops the list.
Own your financial future
You need to make active decisions about saving – and continually revise these to make sure your strategy is still on track. Remember, the person most responsible for your future financial wellbeing is you.
Don’t go with the herd
If everyone does it, we assume it must be right – but often that’s not the case. That’s why so many people buy shares when the market is up, and sell when the market is at its lowest. Before you make decisions, speak to a range of registered financial advisors (with a mixture of expertise) and make sure you do your own homework too.
Narrow down your choices
Look carefully at what your savings needs are in relation to your age and financial position.
If you’re in your 20s and have no dependents, the most important thing is to protect your income. Make sure you put money aside in case of illness, disability, or retrenchment. If you have children, you need to make provision for their education and it’s never too late – or too early – to start. Thanks to compound interest even a small monthly investment can grow to a substantial sum over time.
Protect your health
This includes healthy eating, exercise, weight loss (if you’re overweight), stress management and regular medical screenings. Not prioritising health may put your income at risk and medical expenses could eat into your savings. A comprehensive medical aid is non-negotiable as is a sizeable emergency fund for additional expenses not covered by medical aid.
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