Could our own preconceptions be holding us back on money sensibility?

Writing for The New York Times, Kristin Wong reports that our own brain — and specifically, our thoughts — may be holding us back from being successful with money.

Her column reveals five ways where how we think tends to impact (negatively) our finances.

The first, she writes, is the “present bias.”

“This bias describes our tendency to overvalue the present, often at the expense of the future,” she explains. In plainer terms, this is YOLO (you only live once) thinking, Wong clarifies — that we don’t want to miss out on today’s fun, even if it is costly.

Wong cites a study by the University of Rhode Island that found that this “live for today” thinking “poses significant challenges to saving money,” and “often leads to overspending.”

Next, she writes, is “status quo” thinking, or “reluctance to change.”

“We prefer our current state of existence, so doing anything that might disrupt it — from paying off debt to rebalancing an investment portfolio — feels daunting and uncomfortable,” she writes. This change resistance, she continues, can “make it hard to build good financial habits because we assume we’ll have to make significant changes in order to do so.”

Many people, the article notes, imagine they will have to “cancel all your subscriptions,” or resort to eating only ramen noodles, and not taking vacations, “ever,” as a consequence of saving money. Instead, the article advises, “start small,” and automate savings “as much as possible.”

The third bias is “the optimism bias,” in which “when we think about the future, we tend to assume it will be better than the present,” Wong writes. A study from 2014 found that this bias can lead to people saving “less money when they assume the future will be optimistic.” For saving, this bias translates into people, “even those approaching retirement, neglect(ing) saving because they assume they’ll be in a better position to do so later.”

Instead, the article suggests, it’s better to assume the future will be more like the present — this attitude seems to encourage people to save more.

The fourth bias is “the bandwagon effect,” or “keeping up with the Joneses,” the article explains. This is “our tendency to make decisions based on what we see others doing.” The article cites the example of a woman whose credit cards were getting higher and higher balances. But, she tells the Times, “everybody we knew had credit cards and nobody was worried about paying them off. I saw my friends buying everything they wanted, and I wanted to fit in and do the same.”

To counter this bias, you need your own financial plan that is based on what you and your family want, rather than the fancy neighbours, the article explains. “When you have something meaningful to work toward, it’s easier to counteract this bias,” the article explains.

Finally, the “anchoring effect” is a bias that tends to make us “latch on to the most recent information presented to us.” In other terms, the first idea thrown out to you when thinking about financial products may be the one that sticks in your mind, even when other ideas are better. A 2022 study, the Times reports, found that those with low levels of financial literacy “are more prone to the anchoring bias.”

This is a great and very insightful article.

It’s easy, and frankly, more fun to have bad spending habits. Party like there’s no tomorrow, sure, but then you shouldn’t be surprised when you can’t afford to pay your bills. And you may feel stuck in that “paycheque to paycheque” rut, and think change is not possible. But, as the article says, you can start this long journey of change by taking small steps — being conscious of what you are spending money on, planning and budgeting, and tip-toeing into long term savings by starting small.

With the Saskatchewan Pension Plan, there are no “mandatory” contribution levels. You can contribute any amount you want to your pension plan each year, up to a maximum of $7,200. If you want to automate those contributions, you can set up pre-authorized withdrawals from your bank account that directly add to your SPP retirement savings nest egg. Check out SPP today.

Join the Wealthcare Revolution – follow SPP on Facebook!

One of the key pieces of advice financial writers offer readers is to fund and maintain an emergency fund to help you survive job loss, unexpected house repairs and other major expenses you haven’t budgeted for.

The Simple Dollar’s Trent Hamm lists 20 reasons why you need an emergency fund. Some situations that I hadn’t thought of until I read this blog are:

• Your identity is stolen, locking you out of your credit cards and primary bank accounts.
• You have a domestic crisis and have to move out of your home.
• A relative or friend passes away suddenly in a different part of the country.
• You get your dream job but it means a steep drop in pay.

Sean Cooper’s recent blog The Joys of Home Ownership: Replacing My Dishwasher illustrates precisely the kind of situation where an emergency fund is so valuable. Cooper rents the first floor of his house and lives in the basement apartment. A relatively innocuous email from his tenants in December notified him that the dishwasher was leaking. This problem snowballed into $2,000 of expenses for plumbing, other home repairs and a new dishwasher. Luckily he had cash on hand in his emergency account.

Debra Pangetsu on MyMoneyCoach offers 7 Steps to Saving Money in an Emergency Fund. For example, she suggests:

•  Breaking your savings goal into smaller steps,
• Open a separate account,
• Automating deposits into your emergency account, and
• Using the emergency savings only in an emergency.

How much do you need to save? Two cents blogger Kristin Wong says that experts don’t always agree. Money guru Dave Ramsey believes you should save for three to six months of living expenses in a liquid high yield savings account. Andrew, founder of Living Rich Cheaply agrees you should probably keep some money in a safe place, such as a savings account but he thinks six months of living expenses is a bit excessive. He would prefer to have more of his money invested in a mix of stocks and bonds. Nevertheless Suze Orman recommends eight months of basic costs because it usually takes that long to find another job if you are unemployed.

What’s an emergency? Ramsey says there are three questions to ask before you use your emergency fund. Is it unexpected? Is it necessary? Is it urgent? Money Under 30’s Choncé Maddox also says you should consider whether there is a better way to pay for the expenses and if the benefit of using the money outweighs the cost.

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Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.