Behavior, Not Knowledge, is Essential to Financial Success
Which would you rather get – P3,000 in three days, or P5,000 in three months?
Think about it for a while.
If you answered the P3,000, this usually means you are financially impulsive, since you’d be turning down an interest rate that is much better than what banks and most investments offer.
In a study conducted by researchers from the University College of London, nearly half of their respondents preferred the lower (but sooner) sum – and that these people also showed impulsiveness in other areas of their life. From the article (emphasis mine):
“…researchers suggest money savings or financial behaviors are linked to a set of other personal behaviors, rather than personal knowledge and experience with money.
…[they] discovered impulsive behaviors such as overeating, smoking and infidelity are associated with financial gullibility.”
This means that even if you know a lot about money, investing, and business, it doesn’t guarantee that you’ll be financially secure. What guarantees your financial success is your behavior. If you are consciously planning for the future and spend time evaluating your impulsive desires, then you have better chances of being financially successful – even better chances than someone who had formal training in finances, but doesn’t exhibit those behaviors. Perhaps this is why even the smartest people we know make stupid decisions regarding their money.
How do we use this information to our advantage?
- Acknowledge that you don’t have to know everything to start fixing your finances. One of the obstacles that most people face when it comes to fixing their finances is inaction. They think “Oh I have to read more about saving before I can actually save” or “I need to know more tips before I can start”. Being good with money is not always about facts – it’s also about behavior. While we need to study some things – especially when investing – we don’t need to know much to get started.
- Realize that managing money well is a habit. It’s something you have to cultivate and practice regularly. There is no one-off solution, magical budgeting program, or miracle investment that will save you. It takes regular, continuous work.
- Know that changing impulsive financial behavior may mean changing other aspects of your life as well. My mother was such an impulsive spender, but her impulsive behavior wasn’t limited to money. She was that way about almost everything. From her business endeavors to her anger. For those who are truly impulsive, it may be a more difficult journey to get your finances together – but it doesn’t mean you shouldn’t try.
If impulsive spending and investing was one of your problems, take a look at your past behavior and see how you’ve changed since then. How have these changes affected your finances? How do you feel about the research I quoted above?
Image by cobrasoft from sxc.hu
Read MoreDay#19: Quit an expensive habit.
This is Day #19 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Please stay tuned for the next installment of this series, which will be up tomorrow. Here’s today’s installment:
Today’s Task: Quit an expensive habit.
We all have habits. Some of them are healthy while others can be destructive if we do them mindlessly. The truth is that some habits have negative consequences on our finances. While we can live with most of these consequences, there are some cases where we can’t afford them. Here are some examples:
- That (almost) daily morning coffee.
- Smoking.
- Going shopping as therapy.
- Sending forwarded text messages to your entire contact list multiple times a day.
- Dining out with family or friends during payday.
- Buying lunch from fast food chains rather than bringing your own lunch.
But how do you quit a habit? The first thing you should try is to figure out how much it’s costing you. How much do you spend on that habit per week? Per month? Per year?
After doing the math, find out if your income allows for this kind of expense. For example, when I was still a student, I noticed that I bought bottled water and other drinks each day during lunch. This cost me P30 per day, and since I was usually at school 6 times a week, this seemingly minor daily expense cost me at least P700/month. At that time I was probably earning only P9,000/month since I was just starting out as a freelance writer. I was also the breadwinner, which meant that the P700/month was more than I could afford for something as simple as water. Realizing this, I just brought my own bottle to school every day and refilled it at the water fountain.
If your expensive habit is something you can’t give up completely, then consider simply cutting back. Instead of the daily cup of coffee, why not reduce it to three times a week? Even this simple change can give you a lot of “extra” money which you can funnel into your savings, emergency fund, or an item that matters more to you.
What expensive habits do you have? Can you afford to have them?
Image by vivekchugh from sxc.hu
Read MoreDay#17: Know the things you don't care to spend on.
This is Day #17 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Please stay tuned for the next installment of this series, which will be up tomorrow. Here’s today’s installment:
When it comes to time and money, we usually focus on the things we have to do. Paying the bills, finishing up that report, cleaning the house. While these things are important, we should be equally mindful of the things we shouldn’t do.
Today’s Task: Know the things that you don’t care to spend on.
It’s simple. Just jot down the expenses that really don’t matter to you. Here’s a short list of some things that don’t matter to me:
- Dining out
- Watching most films in the cinema
- Clothes and accessories (as a side effect of rarely going out)
- Cable TV
Things that matter to me:
- Books
- Good quality of food
- Maintaining a solid but beautiful house
- Hobbies such as woodworking and gardening
What does this mean? By making the list of the things that don’t matter to you, you’ll know what expense traps to avoid. For example, why would I spend P500 to try out a new restaurant when I can use that money to buy high-quality ingredients for a home cooked meal? Or, why would I spend P200 to watch a movie in a mall dahil wala lang akong magawa, when I can usually buy 5 books with that at my favorite used books store? It’s like building a list of “not-priorities”.
You can also do this exercise for a major purchase so that you won’t be distracted. When buying a new car, this may be your list of not-priorities:
- Color
- Exterior design
- Quality of speakers
By making this list before you look at cars to buy, you won’t be distracted by the bells and whistles that don’t matter to you. You won’t go “Shit, panget pala gas mileage nito, nadistract ako sa sleek, chromed-up design.” Conversely, if the exterior design matters to you the most, you won’t be distracted by sales pitches about payment terms or storage space.
When we have limited resources, we need to know the things we can “sacrifice”, and the things we don’t care about should be the first to go. That way, we know that we’re left with the things that matter.
Read MoreDay #4: Automate Your Savings
Here’s today’s installment:
For some people, saving is painful. When our paychecks arrive, most of us are excited to spend it. Which brings us to today’s task…
Today’s Task: Automate your Savings.
What does this mean? Basically, you’ll set up your bank accounts in such a way that a specific amount gets paid automatically from your payroll account to a savings account. Doing so has the following benefits:
- Ease. You don’t need to remember to save. “I forgot to save this month” won’t be an excuse again.
- Consistency. Saving becomes regular, and before you know it you’ve built a well-padded emergency fund for yourself and your family.
- Lessens temptation. Since money is automatically deducted from your payroll account, every time you look at your balance, your savings won’t be there anymore. You can’t say to yourself “I can buy a new iPod since I still have X amount in my account.”
Even if you’re only automating P500 worth of savings each month, its still better than nothing.
How to start: First, call the bank where you have your payroll account. (If you don’t know where to find their number, I’ve listed the phone numbers of major banks below, so you have fewer excuses to avoid calling them up.) Ask them if they have a special account that automatically deducts a specific amount from your payroll account each month and transfers it to your savings account.
If their answer is yes (it usually is), ask them how to activate this feature or how to open this kind of account. Also ask a list of the requirements needed and the actions you need to take.
Here are the customer support phone numbers of major Philippine banks:
- Banco De Oro . (+632) 631-8000 or email at callcenter@bdo.com.ph
- BPI. 89-100 for Metro Manila, 1-800-188-89100 for domestic toll-free calls (where available.
- China Bank. (632) 885-5555 or through their online form (I’m not sure they check it, though, as I sent a query last month and they havent replied)
- Metrobank. (632) 860-3000. For provincial areas, 1-800-10-860-3000.
- RCBC. (632) 894-9577, Domestic Toll Free# 1-800-10000-7222
- Security Bank. (632) 867-6788
- UCPB. (632) 811-9111
- Unionbank. 84-186
Have you already automated your savings? Do you have a similar system set up?
Read More5 Reasons why you don't have any savings
If you manage to save at least a small amount of your paycheck every month, move along and feel free to skip this post. This post is not for you. This is for those people who seem to have a hard time saving their money. If you want to have savings but can’t seem to find it in yourself to set aside even P500 or P1,000 each month, here are the 5 most likely reasons why:
#1: You tell yourself that it’s too hard.
Here’s a solution for you: make it easy. What barriers prevent you from saving money? I’ve written a post about ways to make saving less painful, so you can check that out for more tips. But here are some other suggestions:
- Automate your savings. Call up your bank and ask them if they have options for you to automatically send money each month from your payroll account to a savings account.
- If you find yourself using your credit card everyday on things you don’t need, then leave it at home. Some people even freeze their credit cards in ice, but that’s an extreme (and it probably ruins the card).
- Focus on what’s harder. What’s harder is that if your car breaks down and you don’t have enough money saved up for repairs, forcing you deeper into debt. What’s harder is being laid off from your job and being unable to support yourself and your family until you get a new job. In other words, it’s harder to be in a desperate financial situation without a plan. Believe me, planning is easy. Living through the consequences of not planning is hard.
#2: You don’t know where your money is going.
How much did you spend on utilities each month? How much do you spend on gas/transportation? How much money goes to fun/recreation? If you’re giving the computer monitor a blank stare or you’re just giving an estimate, then you need to start budgeting.
You’re probably shrinking in your seat thinking, “Ick, there’s that B word again.” Relax. The good news is that budgeting is not something you have to do forever. You can forget budgeting after you’ve gotten to the point where you are absolutely sure that you’re spending less than you earn (for example, I know that I’m only spending 1/3 of my income, so I don’t stress about my budget as much).
Should you really budget? Yes. Some people don’t even know it but they’re spending more money than they make. How is it possible? Credit cards and other forms of debt. You’ll never know for sure until you start budgeting and seeing where your money goes. Here’s the simple way to do it:
- For an entire month, list all of your expenses as you pay. Utilities, rent, that fruit smoothie you just bought. Gather receipts or jot it down in a notebook – do whatever it takes to list where every single peso goes. Credit card and online purchases included.
- At the end of the month, look at all your expenses. Compare how much you spent vs. how much you earned. If you’re spending more than you’d like, separate the things that are necessary and the things that aren’t as important. Bills, food expenses, rent, and transportation costs fall under the first category. Dining out, watching movies, clothes shopping, unnecessary gadgets all fall under the second category.
- Write down your monthly budget, including savings. Now what you know roughly how much you spend, it’s time to allocate specific amounts to each expenditure (including savings). I recommend that you overestimate your expenses, at least by 100 pesos. For example, here’s what my budget looks like:
- Meralco – P1,600
- PLDT – P1,800
- Water bill – P500
- Drinking water – P200
- Palengke – P2,000
- Groceries – P2,500
- Transportation – P500
- … and so on.
By the way, if you make, say P30,000 per month, don’t make a budget worth P20,000. Allocate the rest of that money somewhere (including “fun money”) otherwise it goes to frivolities you never really wanted that much in the first place.
Once you get into this habit, it’s going to feel easier and natural. Trust me, it’s worth the initial effort.
#3: You don’t have self-control.
The latest iPhone might sound attractive to you, but is it really worth buying if you’ll be stressing about paying the bills the next month? To cover the costs of this purchase, do you have to work overtime for several months? I’m all for personal rewards and enjoying the fruits of your labor, but the true cost of expensive one-time purchases isn’t just limited to the price tag. Here’s are some tricks I use to curb compulsive spending:
- I ask myself “How many hours of work will it take to pay for this thing?”
- I apply the one-month rule. If I still want something after one month, then I know I really want it. You’ll be surprised at the new gadgets and alternatives that are launched in that month.
- For every expensive frivolity I wanted, I tell myself “Every time I give in to a short-term want, I lose a part of a long-term dream”. (I forgot the original source of this quote, but if you know, please tell me.) What are your dreams? Is it to own a house? To travel the world? To leave the rat race and start your own business? To never worry about money again? Keeping these dreams in mind will allow you to shift your priorities and channel your funds on the long-term things that will give you more security and happiness.
By all means, shower yourself with expensive rewards after you’ve reached financial security, but not before. Until you get there, you should be content with treating yourself to a movie or a meal.
#4: You don’t have financial goals.
“I want to be rich someday” is not a goal, it’s a wish. It’s a very vague statement that gets you nowhere. How do you define rich? When exactly is “someday”? And, most importantly, why?
Here’s how you make a real goal:
- It must be quantifiable. “Rich” and “financial freedom” are abstract terms. Do you mean “I want to be debt-free and have a net worth of P10M”? Be as clear and precise as possible, otherwise you’re not 100% sure what your goal really is.
- There’s a deadline. When do you need the money you’re saving up for? 30 years from now? 10 years from now? The deadline will allow you to plan for your needs accordingly.
- You know the steps to get there. How do you get to save up for a P50,000 emergency fund? How much can you put away each month? How many months will it take you to get there?
- It must be about things you can control. Winning the lottery is not a goal, neither is getting an inheritance from your wealthy tita.The winning lottery numbers are random, left to chance, and for all you know, your tita changed her will before she died or she has other heirs you don’t know about. On the other hand, getting a raise, adding new income streams, and creating a business are all within your control, at least partially.
#5: You don’t have the time or energy to manage your money.
If you have the time to watch TV, gossip, or aimlessly browse the internet, you have the time to manage your money. You don’t have to do it all in one sitting if you’re feeling overwhelmed. Take 30 minutes today to list the worth of all your bank accounts, then take another 30 minutes the following day to note your remaining debt. The funny thing is, once you’ve set up a system and tried all my recommendations above, it doesn’t take more than an hour each month to manage your money.
On a final note:
If you have the problems above and you don’t want to fix them or you keep making excuses, that’s fine. It’s your money, it’s your life. Who the heck am I to tell you what to do?
But if you don’t do anything about your money, stop wondering why you’re not able to save. Stop complaining that you have too many expenses or that you can’t afford the things you want. There’s no shortcut, no workaround to saving.True, you can focus on earning more rather than saving, but you’ll never learn how to manage that extra money until you start looking at your expenses and controlling them. Saving is something you have to do, especially if you’re only becoming financially aware now.
Any tips for those who complain that they don’t have any savings? Please share them in the comments.
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