Even if you feel you are at a total loss for any positive money habits, you can still gain new habits to transform your wealth. In theory, it’s simple to get ahead: earn more than you spend and invest the difference. But we all have narratives surrounding money that make this hard to do.
You might have grown up in an affluent household, and now struggle to make ends meet because you’re used to spending without a budget. Or you might have grown up in a poor household, and are scared to spend money—even on essentials—because you’re not sure if you’ll see this money again. Or you might be recently divorced, and struggle to pare down your spending because you’re used to a two-income household.
All of those things are called money narratives, and they affect the way that you view and manage money. In our first article, we went through four basic skills you can learn to help manage your money better. And in this article, we’re going to cover four more advanced skills to help you bring your money skills to the next level.
“Multiple simultaneous attention” is a fancy way to say multitasking. It’s a cognitive skill that allows you to focus on multiple goals at once. And it’s exceptionally helpful when learning to manage money well. More often than not, you’ll have more than one money goal. Say you’re saving for retirement and also want to buy a new house. You will need to split your attention between the two projects. That’s when multiple simultaneous attention comes into play. It allows you to be focused on more than one goal at once.
Multiple simultaneous attention becomes a problem when you have fractured attention. This manifests in one of two ways. Either you jump from one project to the next, and forget the original project because your focus isn’t sustained. Or you have too many projects going at once and can’t fund them all.
When It’s a Strength
However, when this skill is used successfully, it helps you build exceptional wealth. You can sit down with a worksheet and figure out what financial goals you have. Then you can decide which to prioritize. With multiple simultaneous attention, you’re able to focus on multiple goals at once and achieve them. You haven’t decided on too few financial milestones or too many. It can take some trial and error before you have your right medium but stick with it and this skill will help you.
Have an Emergency Fund
An important note here though is that you need to have an emergency fund before you branch out on any financial goals. At a minimum, your emergency fund needs to cover 3 to 6 months of expenses, and a fully funded emergency account has at least a year’s worth of expenses in cash. Your emergency fund is like your financial life vest, it’s there to take care of you when things get rough. Making sure that you have it before you work on funding other goals allows you to worry about those goals without fear of financial crises that may arise.
Tips to Develop the Right Behaviors
With this skill, it’s important to start small. Any time you make adjustments to your budget, you’ll want to ensure that they’re feasible, so start with one or two different goals at first. As you get more comfortable with the adjustment to your budget, you can start to add more. What you don’t want to do is get overwhelmed with projects you want to accomplish and burn out. Instead, a slow gradual build-up will put you on the path to success.
Working memory is your ability to think about a task and then complete said task. it’s a great skill to have, but it can take some practice to maintain. When we’re children, we use working memory all the time. We use it to remember school assignments, arithmetic, and test instructions. But as we get older, our working memory doesn’t get used as much. It might take some practice to get your working memory back to what it was when you were a child.
The biggest question to ask when testing your working memory is this: Can you follow through with your financial plan or does it slip away?
When your working memory is bad, it creates all sorts of problems, especially if you’re an impulse spender. If you don’t have a working memory of your financial plans, you can get off track pretty easily. Before I had a solid understanding of personal finance, I would decide I wanted things without checking to see if I could actually afford them. I ended up in a lot of debt and with bills I couldn’t pay since I wasn’t focused on my overall financial health.
When It’s a Strength
Working memory is great if you keep your financial plan in mind. It allows you to turn down sales pitches by saying, “I’ll think about it” instead of spending without regard to your financial plan. It also allows you to make changes to your financial plan to create space for things you want to do. When you say, “I’ll think about it” you can go home and actually think about it. If you decide it’s something that you want to do, you can then move around items in your budget to pay for it.
Write out your financial plan. This will help commit it to memory. And then you can look back on it when you’re making a financial decision. It’s kind of a failsafe to your working memory. I have my budget written out on my planner that I look at daily to keep me focused on the end goal. I also track my spending to ensure that my working memory is staying sharp. Those are two skills that you can use as well to ensure you’re following solid financial advice.
Category formation is the cognitive basis for higher-level money abilities like applying trends, analyzing information for understanding, and evaluating concepts and skills. It’s the ability to look at things in personal finance and categorize them in a way that’s a benefit to your personal goals. This is especially helpful when you’re deciding what to invest in. You’ll be able to look at short-term and long-term goals and make a plan based on the organization of your money.
For instance, you can put your money into categories: groceries, bills, investments, and debt payoff. And you can also categorize your investments: this is a short-term investment; this is a long-term investment.
When you categorize your money like this, it helps you stay on task with your budgeting. It’s harder to move money around when the money has a specific purpose.
When you’re unable to form categories in personal finance, you won’t be able to advance your financial goals. You will have general ideas of things, but won’t be able to establish patterns of setting aside money into categories.
On the other hand, you can get so stuck on your current categories that you don’t adjust them even as your goals change. If you buy a car, you don’t need to keep saving for a car. Instead, that money should be put toward car maintenance or other financial goals.
Category formation allows you to develop strategies for saving and investing money. You’re able to set money aside for multiple goals and create investment strategies to grow that money. It can take some time to develop strong investment strategies but using category formation will help you decide what’s right for you.
Tips to Develop the Right Behaviors
You can develop category formation by setting aside some time to look at your finances. Analyze the different financial categories you can separate your money into. If you’ve created a budget, then it’s just a matter of ensuring your money is going to the right places. Once you’ve separated out your budgeted money, you can enhance this skill with investments. Take some time to analyze different investment categories.
Pattern recognition is the ability to see trends in finance and then act on them. This is crucial in personal finance when you’re just starting out. I’ve personally used pattern recognition to help me reign in my spending when it’s become a problem. If you track your spending, you can do the same as well. You can also use pattern recognition to look at market trends and analyze trading data if you want to get into active investments. If you don’t, you can use pattern recognition to look at mutual funds and ETFs and pick the one that’s right for you.
Pattern recognition becomes a problem when you find yourself stuck in analysis paralysis. If you’re unable to find the patterns, it may feel like it’s hard to make any financial decisions. Another problem can arise if you notice any patterns, but can’t seem to find the one that fits you properly. That’s when you need to step back and take a moment to decide what your goals are. Then look for patterns that either lend themselves to the goal or are adverse to the goal. Once you’ve found those patterns, you can start to make changes to your habits.
Pattern recognition in finance is a huge strength. You can track market trends and see when to buy and sell stocks. You can track patterns in your spending and find where you can cut back on spending. Almost all of money management is about building and sustaining patterns. The more you can use pattern recognition in your life, the stronger your finances will be.
For instance, I track my monthly spending. I also track my moods. I found out that when I’m sad, I tend to spend more money. Now that I know that data, I can decide to make different choices, and save money by actively choosing not to shop when I’m sad.
And, while you can’t time the market, buying low and selling high is a long-proven formula for wealth creation.
Tips to Develop the Right Behaviors
You can start to do pattern recognition by tracking things that are important to you. A great way to start is with your spending. You learn so much about who you are as a person when you track spending. Once you’re confident that you’ve identified and corrected negative patterns with your spending, you can start to expand your pattern recognition.
Setting yourself up for success financially starts with developing strong habits. And you need to start by taking small steps. These four techniques we talked about in this article are building blocks to help you achieve financial success, but they only work if you tackle one part of your financial life at a time.
The first step is to track your spending and create a budget that fits your needs. The second step is to build an emergency fund to help yourself when trouble strikes. The third step is investing in an employer-sponsored retirement account or an IRA to set yourself up well for retirement. After that, you can create short-term savings goals that meet your needs.
Building solid financial foundations is about creating actionable goals that you can achieve. Start small, and then go from there.
How Should I Set Up My Budget So That It Works for Me?
I always recommend that you start with tracking your spending for three months. You’ll be able to see pretty clearly what you spend money on and what you don’t. It’s helpful if you can create a pie chart (I use Excel) to visualize your spending. If that’s too complicated, apps like Personal Capital will create spending charts for you.
After you’ve tracked your spending, you can create a budget that fits your needs. If you find that you’re spending too much money on something – like takeout – you can adjust and create a spending limit to help you curb unnecessary spending and create short-term and long-term spending.
How Do I Balance Short-term and Long-term Financial Needs?
Like all money endeavors, balancing long-term and short-term financial goals will take some trial and error. But there are some things that you can do to help set yourself up for success. First, you can prioritize your financial goals. Maybe you want to buy a house, take a year off, and retire at 65. Decide which is more important. If you want the house first, prioritize your dollars to the house, and then set aside a smaller amount for the retirement and gap year.