Mindfulness isn’t a new concept, but its adoption into mainstream culture is a relatively recent phenomenon.
If you’re a regular reader of our updates, you might be familiar with the most popular meditation apps on the market, the importance of sleep hygiene, and the Japanese design principles that can instil a clutter-free sense of calm in your home.
But mindfulness can play an important role in all aspects of your life – finances included.
Keep reading for a look at the simple steps you can take on the path to money mindfulness, and why taking a step back is so important.
1. Take a step back to avoid emotional decision-making
According to the work of Nobel prize-winning psychologist Daniel Kahneman, our brains broadly operate using two distinct systems:
- System 1 is emotional and driven by instinct, allowing us to make snap decisions, perfect during our hunter-gatherer days.
- System 2 is slower, more logical, and less driven by emotion. It allows us to plan and take stock.
Just as meditation is about breathing and experiencing the present moment more fully, so too can money mindfulness help you to take a step back.
If the stock market tumbles and you rush to withdraw funds, this is System 1 taking control. Filling an online shopping basket late at night and pressing “Buy now” on impulse, without reviewing your choices? System 1 again.
Take a deep breath and allow your brain to engage System 2. Doing so might help you remember that stock market volatility is built into your long-term plan and that it’s time in the market, not timing the market, that counts. A snap decision might simply turn a paper loss into a real-life one.
Likewise, consider sleeping on your purchase decisions. If you still want the items in your shopping basket the next morning, then go ahead and spend.
Your System 1 decision won’t necessarily be the wrong one, but it might be beneficial to test it against the logic of your System 2 brain.
2. Understand the biases that could influence your decision-making
While we hope that all the decisions we make are well-informed and rational, it’s also true that humans have in-built and subconscious biases.
At Jane Smith, we’re on hand to help you manage your investments in an emotion-free way that aligns with your long-term goals. But understanding the biases that affect your decisions can help you to remain calm and mindful, which is especially useful during market downturns or periods of geopolitical uncertainty.
Biases generally come in two forms: emotional and cognitive.
Emotional biases are System 1. They are emotion-led and often spontaneous, and you might not realise they are influencing you until they already have.
Examples include:
- Overconfidence bias: You might be an expert in a certain field and believe that this gives you an edge over others, but life rarely works out that way. The stock market is unpredictable, and one “right” decision doesn’t mean the same logic will apply next time.
- Loss-aversion bias: By selling a falling stock, you are essentially cutting your losses, but our human desire to win could see you hold onto it even as it tumbles further, simply to put off the feeling of loss.
Cognitive biases are System 2. They are based on pre-conceived (and possibly incorrect) assumptions and ideas. Specific biases include:
- Confirmation bias – This will lead you to more readily seek out information that you already agree with. You’ll read the newspaper that aligns with your politics, for example, and might make financial decisions based on what you already believe to be true.
- The bandwagon effect – When lots of people swear that something is true (that this brand is a must-have or a particular stock is set to rise), it can be easy to assume that so many people can’t be wrong. But does the brand match your values, or the stock fit your risk profile?
Understanding that these biases exist, that they are natural, and that they can be avoided by taking an objective step back could help in all aspects of your financial and non-financial life.
3. Mindfulness can help you change your approach to money and finance
We’ve all read the reports that state our money attitudes are formed young, possibly as early as age seven. But this doesn’t mean that our attitudes can’t change.
Your attitude to risk might be different now from when you were younger (financially and non-financially). And spending habits can change, too.
Later in life, after a lengthy career, you might find yourself financially comfortable and keen to spend. Equally, you might remain disinclined to part with your hard-earned money.
Take a step back and think carefully about the spending decisions you make.
If healthy living is important to you, a gym membership is a justifiable expense. So too might be the extra cost of organic food. Likewise, if seeing the world is an important part of your retirement plan, travel expenses should not be second-guessed or shied away from.
Unapologetically embrace the spending that aligns with your lifestyle choices and identity, whatever your long-standing attitudes to money.
Get in touch
If you’re looking for an independent financial adviser in Milton Keynes or Olney, look no further. At Jane Smith Financial Planning, we’ve been helping clients for 30 years, so contact us at info@janesmithfinancial.com or call 01234 713131 to see what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
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