Decisions about money can be difficult – they are often abstract, require us to imagine our future selves and can be typically driven by emotions. Whether they are about what brand of cereal to buy, how much to save for retirement, or what our next car should be, we are constantly bombarded with hard money choices. It’s easy to get caught up in the details of these decisions and allow them to stress us out. Unfortunately, this stress makes us more irrational. The problem is, Americans are finding it more difficult than ever to focus on our long-term goals. This is why we embarked on a study to find ways to help improve financial decisions under stress.
The Decision Lab teamed up with Capital One to uncover simple ways to reduce the effects of stress on our financial decisions. In particular, we focused on how thinking about the big picture can affect financial decisions under stress. Typically, stress causes people to get stuck in details and ignore long-term impacts. So, we wanted to see whether a quick mental exercise could reverse this effect and make people better with money. To do this, we ran a study with 1,011 nationally-representative Americans.
We found that ‘bigger-picture’, abstract, thinking styles led to healthier financial behaviors. Abstract thinking means focusing on the broader situation rather than the details. In particular, thinking about why we might do something instead of how we might do it causes us to be more rational. Taking that perspective lets us feel more in control of our finances, budget better, save more—and ultimately achieve more of our financial dreams.
Quick Exercises to Develop a Smart Money Mindset
1. We can make better decisions by focusing on what’s most important to us.
Too often we get stuck on small details instead. Even when I’m not thirsty, sometimes I find myself checking out all the different flavours anyway—even though I don’t need anything! When we keep the big picture in mind, we make better decisions with our money. One trick to overcome this is to choose a moment in your buying process where you make it a habit to reflect on the big picture and your values. For example, as you’re lining up at the supermarket register, I look at my shopping cart and ask myself: does this reflect my values as a person, and does it get me where I want to go?
2. Learn, forgive yourself, move on
When we make a mistake, we often beat ourselves up over and over again every time we think about it, dragging the bad decision around sometimes for weeks or more. This increasingly discourages us, increases our stress, and ultimately makes it harder to make the right choices in the future. Instead of beating yourself up, be kind to yourself. Once you’ve realized what the mistake was, forgive yourself and move on. You’ll know better next time, and forgiving yourself and managing your stress levels will help you to make better decisions down the road.