If you’re paying off student loans, saving for major goals (a home, car, wedding), and saving for retirement all at the same time, it can be difficult to imagine relaxing about money or easing into a routine that helps serve all three of these masters. But when it comes to crafting a secure financial future, it turns out attitude is half the battle. Research demonstrates that financial success requires a measured approach—a bit of optimism and a bit of strategic investing.
Good investors know that controlling (or at least not blindly following) human nature is a necessary ingredient in building a nest egg. But you need to strike a balance between spending money for instant gratification and making fear-based investment decisions or leading a miserable penny-pinching life. Here’s a look at how you can put mind over matters financial.
Ditch Your Cynicism
The one financial asset you have in your young adulthood is this: Your “human capital” or ability to work for a long time horizon. Sure, you’ve heard that it’s best to “work smarter, not harder.” But when you’re young you have the natural ability to “work longer” than older investors. That means if you pursue even the most incremental opportunities to grow income in your field (or via a few side hustles—like having a roommate or freelancing), small and early advances can go a long way toward positioning you for financial success if you start saving.
If you’re in the corporate world, keep in mind that a cynical and suspicious attitude can erode your earning potential, in that Debbie Downers and Eeyores aren’t typically seen as promotion picks or the most pleasant team players. Indeed, cynics typically earn less money than more chipper folk who build strong social capital and networks that can support them throughout their career.
Set SMART Goals
So how are you going to build some financial confidence? First up, set a budget, monitor your money regularly to see where it’s going, and once you’ve got a grip on that, start setting some financial goals. The goal with this is to give you what’s known as “self-efficacy,” a psychological term for your gaining confidence in your ability to handle challenging situations. Part of self-efficacy is internal, and part of it is external. For instance, if you want to lose weight and you refocus your social life around physical activities and healthier food and start going to nutrition talks, you’re placing yourself in contexts that support your goal—walks and hikes, education with like-minded healthy folk, and so forth. Sipping black coffee solo at the doughnut shop and mourning crullers? Not so helpful.
With respect to goal setting, consider the acronym “SMART” which stands for Specific, Measurable, Achievable, Relevant, and Time-bound. The “SMART” concept is credited to ideas espoused by Peter Drucker, the management consultant, and surfaces in conversations about everything from professional strategic planning to health and fitness plans. The SMART approach lets you create a controlled experiment with a high likelihood of success, and helps you create a realistic framework for achieving your goals. When you’ve seen yourself succeed at a financial goal, you’ll feel empowered to set another, and another, and another.
What’s an example of a realistic goal? Consider a specific goal (paying off a $2000 credit card balance or your student loans) that is measurable (you can watch the balance decline), achievable (you can afford to pay an extra $150 a month above the minimum payment, and having this funding isn’t contingent on, say, hit-or-miss commissions at work or an unpredictable Airbnb clientele), relevant (you’ll eliminate the debt), and time-bound (you have a timeframe in which you plan to achieve the goal—say, 10-12 months.) Once you’ve seen yourself hit this goal, you can set another—or a bigger one, as long as you consider realistic steps to achieve it.
Once you’ve seen yourself hit this goal, you can set another—or a bigger one, as long as you consider realistic steps to achieve it.
Read More: How to Pay Off Debt
Tweak Your Budget
Assuming you’ve got a budget (and if you don’t, you can use tools such as Mint.com or create a DIY monthly budget using bank and credit card statements) you can see where your money goes—perhaps to debt, student loans, or a latte or travel habit. And that will allow you to see where you’re overspending or could adjust your approach. Every budget should allow for discretionary (leisure) spending—meals out, a spa treatment or rock concert, wedding gifts. But if you’re going to become a saver you’ll need to trim some fat from the budget.
Keep in mind as you review your budget that there’s a distinction between “spending less” and actually “saving.” The former means your “minus column” isn’t as bad as it once was, the latter means your “plus column” is actually growing. If you’re spending less but that isn’t translating to saving more, make sure you’re not replacing one sort of expense with another—unless it’s really important.
For instance, if you drop your $20 per week latte habit but replace it all with Uber rides, you’re not freeing up savable money—just shifting priorities. If you drop your $20 per week latte habit but spend the money on a tax-deductible membership in a professional networking club that could lead to new income, it’s more justifiable.
Consider using the SMART approach to saving—reallocating a portion of funds each month to savings or investments that weren’t previously going into your plus column. Maybe instead of so many dinners out ($50/meal) you and friends pot-luck or picnic ($15/meal); maybe instead of a full-on cable subscription ($50-60), you subscribe to Netflix or Hulu (each about $9/month). Those two gestures alone would free up about $75/month. Sounds like the beginning of a savings goal, right?
Read more: How to Make a Budget
Have a Sense of Agency
Successful savers and investors understand that they must have a sense of personal agency in the outcome of their situation—or what some in the behavioral finance community call an “internal locus of control.” They understand that they have choices as well as responsibilities to learn and understand those choices, that financial literacy is up to them, and that they can hire professionals to advise them and help shape their savings and investments. (A good financial literacy primer: Get a Financial Life, by Beth Kobliner.)
They also understand that their investment decisions represent opportunity costs—focusing on college (and related debt) now may mean postponing a home buy till later, postponing saving now may put pressure on retirement investing later. And they understand that they need short-term and long-term goals within their financial plans. Once they begin to meet those goals, they will need to exercise discipline not to undo the good they’ve achieved.
Read more: You’re Ready to Invest. Now What?
Indeed, once an indebted person becomes a saver and investor, more mental balance is required to stay the course with good habits. As you watch your investments ride the economy’s ups and downs, it’s easy to want to withdraw money from the market when things are risky and shovel money into the market when prices let you buy low.
Over time, that doesn’t make a lot of sense—most financial advisors recommend you stay the course no matter what. If you reshuffle your investments every time the market zigs or zags or a particular industry sector you’ve invested in trends up or down, you’re doing yourself a disservice. The good news is that there are new robo-advisor services like Betterment, Ellevest, and Wealthfront that help you invest according to your goals and automate all the portfolio management for you so your emotions don’t rule your decision making.
Read more: An Earnest Guide to Decision Making
If it sounds like the same discipline you needed to get out of debt and become a saver will be required to keep you flush and in the black, you’re correct. The entire field of behavioral finance studies humans’ interference in their own financial success. The SEC recently published an investor behavior report citing many of the principles discussed here as contributing to investors’ “mistakes”—ranging from the magical belief in a “silver bullet” investment (often a precursor attitude to falling for financial fraud) to financial illiteracy (using payday loans when better options are available, not understanding how interest rates work, etc.) to reactionary day-trading where transaction fees undercut investment gains and fail to make sense over time.
The good news? You’ve got the power to take charge of your financial future—and to put an oar into the water from wherever you are in life.