Can not thinking enough, or even overthinking, about your money jeopardize your financial future?
New research from the McDonough School of Business reveals that practicing financial mindfulness can lead to better financial outcomes — as well as more positive psychological well-being.
After seeing financial technology companies throw around buzzwords like financial mindfulness, Simon Blanchard, a Provost’s Distinguished Associate Professor and Dean’s Professor, wanted to study exactly what the term means and how, if anything, it could affect someone’s finances.
“When I started learning that companies in the financial space were using this word, I thought that was really interesting because what does it mean to be financially mindful?” Blanchard said.
With collaborators from Cornell University, Blanchard collected data from 2,000 consumers and partnered with two financial technology companies. He administered a survey that measured consumers’ financial mindfulness to determine whether higher financial mindfulness could be tied to positive financial outcomes.
Learn more about financial mindfulness, what it can do for your wallet and some strategies to start incorporating it into your life.
Ask a Professor: Simon Blanchard on Financial Mindfulness
What is financial mindfulness?
In our research, we define financial mindfulness as comprising two key components:
- Financial Awareness: This involves a clear understanding of your current financial situation, including your assets, liabilities, income, and expenses.
- Financial Acceptance: This entails acknowledging your financial state without judgment, allowing you to make informed decisions without being swayed by emotions, whether positive or negative.
What are some of the emotions that can cloud financial decision-making?
When we think about money, the emotions that often come to mind aren’t excitement from having too much, but rather frustration, anxiety, or even a sense of powerlessness. These feelings can make it harder to exercise self-control and approach financial decisions rationally.
For example, can you look at your credit card statements without feeling upset? Can you review your bank account balance and stay calm, even when things feel tight? These moments can evoke strong emotions, but financial mindfulness helps you manage them. Financial acceptance is not about complacency or saying, “I’m broke, so I’ll just accept it.” Instead, it’s about acknowledging your financial situation without judgment and using that clarity to make decisions that are in your best interest.
Sometimes, this might mean realizing that constantly stressing over every expense isn’t sustainable. A mindful approach might allow you to indulge occasionally — like treating yourself to a favorite latte while doing your monthly budgeting — without guilt, knowing that this small action can boost your mood while doing an important task without jeopardizing your long-term goals. It’s about finding balance and ensuring that your emotions don’t take control, whether by driving excessive spending or creating undue restrictions.
What are some benefits consumers can experience by practicing financial mindfulness?
We’ve found that people with financial mindfulness are less likely to engage in financial avoidance. They are less likely to ignore their finances, such as avoiding emails or statements from their credit card companies. They engage with their financial situation proactively, even when it’s uncomfortable. That has the potential to help them avoid issues like unexpectedly accruing interest or incurring overdraft fees.
Financial mindfulness also reduces the odds of falling into common decision-making traps like the sunk cost fallacy – continuing with unproductive investments simply because they’ve been in place for a long time. Instead, financially mindful individuals can make more rational and forward-looking choices.
In a field study with Debbie, a financial technology company, we found that individuals with higher financial mindfulness have higher credit scores. This was largely due to their financial acceptance — the ability to confront their financial realities without judgment.
Are certain people more likely to be more financially mindful? Is financial mindfulness easier for people from wealthier backgrounds?
Financial mindfulness can be cultivated by anyone, regardless of their financial background.
This could explain why we haven’t found financial mindfulness is influenced much by the amount of money someone has. For example, while people from wealthier backgrounds might have fewer financial stressors, they can still struggle with emotional reactions to finances or fail to engage in mindful behaviors like reviewing their financial accounts. Conversely, individuals from less affluent backgrounds may develop higher financial mindfulness by regularly engaging with and managing their financial realities effectively.
Ultimately, financial mindfulness is less about the amount of money one has and more about how one interacts with their finances — through awareness, acceptance and proactive decision-making.
What are some common mistakes people who are less financially mindful make?
One is overreacting to changes in the external environment. Using data from Aura Finance, we looked at people’s desire to try to ‘buy the dip’ when the stock market experiences a downturn. If the market drops, are you going to overreact and try to time it and buy it at the lowest bottom? People who have higher financial mindfulness are better able to be aware that the market is moving down, so they can react if necessary but do not try to time the market and overreact to any movement.
Sometimes you might be looking at your budget and see trends and overreact to those trends when there might be a bit of variation that naturally just comes. Sometimes your budgets and expenses go up and down. You can’t expect everything. It doesn’t mean you need to make lifestyle changes every time you might be off by $10.
The other mistake is making financial decisions and not being able to enjoy it because you’re still feeling guilty about the state of your finances. You want to be deliberate. If you want to treat yourself and think you can do it, you don’t want to let your emotions take over. Once you make the decision that you’re going on vacation that you deserve and can afford, can you enjoy it without constantly thinking, ‘Man, this is really expensive’?
Your study concluded financially mindful people were more likely to take financial risks. Is that a good thing?
It sounds counterintuitive, but it’s not about uncalculated risks like taking random bets but being able to handle uncertainty. They’re more likely to know enough about their finances that they can afford to take the risk and be more comfortable dealing with the ebbs and flows that come with investing money.
Acceptance comes into play because you have to deal with the emotions. If you were investing in 2020 or any one of the crises, the market’s going to go down, and you have to be able to say, ‘My money is going to move, but in the long term I’ll be fine, and I’m not going to overreact and sell everything or try to time the market.’
What are some strategies to build financial awareness?
Start by taking advantage of the variety of tools financial institutions have put together. If anything, you don’t want to get into the habit of checking your bank accounts every day and stressing about your balance because you can’t control that.
But you can take advantage and make sure you’re on the right track by looking at your monthly statements. Set in a good monthly practice of reviewing your finances. A good practice for that is to create rituals so you can enjoy that. For example, make the first Sunday a budget review day where you go to Starbucks, take your laptop and consolidate all your accounts in one place. Treat yourself to a drink so that it becomes a ritual that is also pleasurable.
How can we build financial acceptance?
Building financial acceptance starts with understanding and managing the emotions that arise when dealing with money. The first step is recognizing these emotions. When facing financial decisions, ask yourself if your emotions — whether stress, frustration or guilt — influence your choices in a way that you might regret later.
To improve financial acceptance, practice deliberate decision-making. For example, if a situation arises where you’re tempted to make a purchase you’re unsure about — like ordering dessert at a restaurant despite financial concerns — pause for a moment before responding. Taking just a few seconds to reflect, especially in situations involving peer pressure, can help you make a decision aligned with your financial goals.
Does being more open to conversations about money build financial mindfulness?
There are a lot of differences culturally around how you talk about money. Your context is important, but developing a group of friends who can help you talk about money can be helpful.
You have to be comfortable with the fact that talking about money can mean talking about how comfortable you are with spending. You don’t want to feel like you can’t talk to your friends about your inability or unwillingness to spend the way they are without judging them either. That takes practice and time.
We think about buying gifts with money, but you can also give time and show effort. Around the holidays, it’s tempting to just fall for the, ‘I’ll fix this later type of mentality.’ But the reality is the anticipation of that can also get you to think creatively about the way you can show your appreciation to others that may not always involve the most expensive gifts.
