Those who hear me talk about finances will often hear me say that most financial problems are not money problems. There is typically some underlying aspect that needs to be resolved before we can overcome the money side of things. This concept is why it is so important to understand the importance of behavior when it comes to personal finance, and the process of change when it comes to building wealth.
The study of behavioral finance has posited that people tend to rely on emotion and cognitive bias to make their financial decisions. [4] Poor personal finance habits often lead to cycles of debt and financial strain. These habits can be highly resistant to change and often share characteristics with addictions. As an example, behavioral stressors can trigger a spending cycle; followed by shame when the out-of-control behavior has passed; which is followed by remorse and defensiveness as you deal with the outcome; which has the potential to then trigger a spending cycle and perpetuate the situation. [1]
Recognizing these behavioral patterns and identifying positive ways to influence this can mean the difference between growing wealth or sinking into debt. [3] While changing your financial behaviors is an intentional and time-consuming process [2], defining the change process creates a metric for understanding your progress. The Transtheoretical model of change is the most commonly used model for behavioral change. Recognizing where you are in these stages of change and adapting positive financial behaviors is foundational to wealth growth. Building positive financial behaviors lead to less stress and increased wealth over time.
The Transtheoretical model of change establishes the process as a transition through denial, ambivalence, preparation, action, and maintenance. Although maintenance is the ultimate goal, there is an understanding that relapse can occur at any stage. Understanding which stage most closely resembles your current state can lead to tailored approaches for positive change. [1] While maintenance is the goal, it is important to understand that the earliest stages are an important part of a potentially fruitful process rather than a permanent condition of hopelessness or a phase to be rushed through.
You can start applying this knowledge today by tracking your spending habits over the next two weeks or so. Take note of what you purchased and why you purchased it. What were some of the influences on your spending decisions? I teach my clients about this process and walk with them as they transition from awareness to determining a mindful approach for new behaviors that work with their goals and aspirations. What changes, if any, are you thinking about making? What is one thing you can do today to help you do that? Share in the chat.
References
Grubman, J., Bollerud, K., & Holland, C.R. (2011, March 1). Motivating and helping the overspending client: A stages-of-change model. Financial Planning Association. Retrieved October 30, 2022, from https://www.financialplanningassociation.org/article/journal/MAR11-motivating-and-helping-overspending-client-stages
Rahimi, A., Hashemzadeh, M., Zare-Farashbandi, F., Alavi-Naeini, A. M., & Daei, A. (2019). Transtheoretical model of Health Behavioral Change: A systematic review. Iranian Journal of Nursing and Midwifery Research, 24(2), 83. https://doi.org/10.4103/ijnmr.ijnmr_94_17
Beeson, L. (2022, March 16). Changing how you think about spending, saving can change financial behavior. Phys.org. Retrieved October 28, 2022, from https://phys.org/news/2022-03-financial-behavior.html
McClure, B. (2022, June 28). An introduction to behavioral finance. Investopedia. Retrieved October 30, 2022, from https://www.investopedia.com/articles/02/112502.asp
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