Your attitude to money may be holding you back
Let’s face it. Money is stressful, and especially so at the beginning of the New Year, right after the holiday spending binge. Spending, saving, investing, statements, bills, budgets – for many, maybe most, people, it adds up to money anxiety. For some, you feel like a deer in the headlights – frozen, unable to move or act. And that just piles on the problems.
It’s all about money psychology – your relationship to your money and personal finances.
It’s easy for financial advisors to prescribe a list of resolutions to follow every year. Don’t get me wrong, these are solid, practical money moves anyone can make. Set objectives, make a plan, budget, live within your means, and all the other financial planning moves everyone should make (but usually don’t).
What’s not so easy is to get behind the psychology of money – the mental roadblocks you set up yourself that lead to the vicious circle of money anxiety.
Here’s my list of the most common ones. If you acknowledge that some or all of these apply to you, you’ll be well on the road to regaining financial control and confidence.
What if things go wrong?
Fears and doubts are major psychological stumbling blocks in every area of life, not just financial planning.
You’ve heard all the excuses and rationalizations: “You have to have money to make money,” “only the rich can invest,” “I’m no good at ‘accounting’”. Maybe you’ve used them yourself. Here’s a tip: They’re all wrong. They’re just excuses to reinforce your fear, doubt, and pessimism.
For example, anyone can set up a personal budget. List your monthly income and expenses. If your expenses exceed your income, make some changes. It’s not rocket science for Pete’s sake. Absolutely nothing to fear here, folks. Your don’t need a spreadsheet or an accounting degree. There are even all kinds of apps to do it for you, if you can’t find a pencil and paper.
I need to be right
Seeking perfection is another common psychological hurdle when it comes to money management.
My advice? Forget it. Nobody’s perfect. And – this is key – no one expects you to be!
Take investing. It’s a messy business. Stock markets fluctuate. Sometimes they crash badly, as in the past year. Your investments will be affected – there’s just no way around it. Even if you just have piles of cash in a so-called savings account, inflation erodes your purchasing power every day.
The idea here is not to expect the perfect investment or create the perfect portfolio. Instead, when you open an RRSP or a TFSA (and everyone should have these plans for saving money in a tax-efficient way), and put investments into them, be realistic about the risk you can accept, and your financial objectives. Then select investments to match.
This year, for instance, the smart money will be looking at stock sectors that have languished over the past few years of the low-interest rate environment, but are now in the sweet spot for gains in a higher interest rate environment. These include resource-exporting emerging market equities, global sectors with pricing power (banks, industrials, healthcare), and international value stocks. They’ll be avoiding the kind of growth stocks that relied on near-zero rates for steady, seemingly never-ending gains: The mega-cap tech stocks come to mind –all of which have dropped drastically in the past year.
They’ll go up and down over the years. But at least at a level you’ll be comfortable with.
I’ll do it later
Procrastination is another common psychological block. In the world of personal finance, it can cause all kinds of havoc. In the long run, it’ll affect your financial health.
For instance, putting off the effort of coming to grips with your debt. If you routinely just pay the minimum on your credit card balance, you’re just digging a deeper hole. Interest on the remaining debt just gets added to the balance, so you’re paying interest on interest. You’re compounding your debt. And credit card debt comes at a very high interest rate.
So don’t wait. Make a plan to pay off those high interest credit cards first. If you have to, transform that “bad debt” into “good debt.” Use a personal loan at a lower rate to consolidate your high rate debts. Use a personal line of credit or a zero-interest credit card balance transfer promotion. And then be sure that pay that off as fast as possible.
Another example: Don’t put off saving, even if you have debts. Even a little extra every month contributed to an RRSP or a TFSA can build up to an emergency fund at first, and then a longer-term investment plan as you get your finances under control.
So this year, resolve first of all to get rid of those mental blocks and psychological hurdles that are clouding your relationship with your own finances.