When it comes to improving your personal finances, small shifts in how you spend and save can add up to big dividends. Whether you’re already confident about money or not, you can always benefit from learning new mental tricks that can help balance your spending and allow you to prioritize your values.
Although we like to think of ourselves as rational when it comes to our money decisions, people don’t always do what they intend to do. While the majority of our financial decisions should be carefully planned, we can build good money habits using mental shortcuts, which can bring us closer to our goals and help us find satisfaction in life.
These three mental strategies can help align your behavior with your goals and intentions.
1. Create a new beginning
The “fresh start effect” theorizes that people are more motivated to make a change at landmark times—like the start of a new year, birthdays, anniversaries, the beginning of a semester, holidays, or other dates of personal significance.1
But you can make a fresh start anytime you’d like, and use these fresh starts as opportunities to evaluate your financial position and reinforce good money habits. When you decide to start fresh, focus on one or two goals that are priorities rather than spreading yourself too thin among a number of them.
Listen: The “fresh start” effect
Here are some financial goals you could focus on using the fresh start effect:
- Paying down or consolidating debt
- Growing your emergency fund
- Reviewing your insurance and estate planning needs
- Buying a home or refinancing a mortgage
- Increasing your retirement savings or searching for new investment opportunities
- Saving for your children’s future education expenses
2. Set a deadline
The deadline effect states that people are better at following through with tasks with defined endings. Strategic deadlines with timelines can help keep us accountable to ourselves and move us closer toward our goals.
Setting a personal deadline gives us a metric by which to measure our progress and assess whether our actions and habits are leading us in the right direction. Small wins along the way can motivate us to keep going. And if we keep our deadlines realistic and achievable, we’re less likely to procrastinate or give up.
According to studies, deadlines put us in a high-alert “arousal state,” especially if there are potential negative consequences for not completing a task by a certain time.2 You can use the deadline effect to help build good money habits by setting time frames around your personal finance goals.
For example, if you’d like to save up for a new car that costs $30,000, set a specific date for when you want to receive those car keys. If you give yourself three years, you’ll need to save about $834 per month to have enough to buy the car without a loan. Having a realistic target date adds healthy pressure to stay consistent with saving for your goal.
3. Create positive “defaults”
Default bias not only causes us to accept choices given to us, but to stick with them. As creatures of habit, we stick with what we know, even if there are better ways of doing things. Research shows that loss aversion—a theory that states that we work harder, sacrifice more, and take bigger risks to avoid a loss compared to a gain of the same value—causes us to choose the default option presented to us.3
This can be costly—such as when you keep an expensive phone or insurance plan you’re used to, even though there may be other affordable plans that meet your needs. But if we’re aware of this bias, we can change our defaults and create good money habits along the way. You can even create new positive defaults—like setting up automated transfers to your savings account.
Instead of going for the defaults you’ve been used to, you can lay out all the choices and ask yourself which one suits you best. If you’ve stuck with the same car insurance policy for years, for example, look for more budget-friendly ones in the market.
By using these mental strategies to your advantage, you can build good money habits that can improve your personal finances and disposition along the way. You’ll find it easier to drop bad spending patterns and take positive steps that lead to better decision-making.