Financial health may be highly correlated to your mindset.
Dr Sarah Newcomb, behavioral economist at Morningstar, reported some fascinating findings at a conference I attended recently. There are implications for each person, and some things you can do right now to become more financially healthy. Please keep in mind that the information provided here is based on notes I took regarding Dr Newcomb’s presentation, and any errors are my own. This is not intended as personal financial advice.
Financial health has two dimensions
Dr Newcomb’s findings indicate that financial health has two dimensions: economic stability, and psychological well being. Psychological well being in this definition means how a person feels about their financial situation. Both areas need to be thriving in order to have financial health.
This makes sense, right? We all know someone who acts like a Scrooge McDuck, with lots of money (economic stability) and a psychological attitude of a miser, refusing to spend money even for basic necessities.
And on the flip side, we probably all know someone who has no money, and yet spends money like it’s water through their hands, without (seemingly) a care in the world. This person may feel ok about their financial situation, but in reality they have very little economic stability.
Financial health is a function of circumstances, mindset, and everything else.
How can I improve my financial well being?
Here’s where Dr Newcomb’s research gets interesting. There are two “mindset” areas she found that can significantly impact a person’s financial health and well being. And those two areas can each be identified with a simple question.
Mental time horizon
The first psychographic area or mindset is related to a mental time horizon. Here’s the question:
When it comes to your finances, how far ahead do you tend to think and plan?
The answer can range: days, weeks, months, years, decades, generations. The further ahead someone thinks correlates to a higher sense of financial well being.
The second psychographic area that can have a positive impact on financial health is related to confidence. Here’s the question:
On a scale of 1 to 10, how much do you agree with the statement, I can handle whatever comes my way financially.
On the scale, 1 indicates very low confidence in a person’s ability to handle anything financially, and 10 indicates extremely high confidence.
Higher confidence is tied to positive financial well being. If a person doesn’t feel confident they can handle the unknown, they are likely to have negative feelings around money.
What can I do about my own situation?
Dr Newcomb also gave some relatively easy ways to increase your score in these two metrics.
Mental time horizon: What is your mental picture of the future? Get very clear about what your mental picture of the future is, with lots of detail and clarity. If you can’t see it, it almost doesn’t exist in your mind. Changing the clarity and detail in your mental picture can have a positive impact your mental time horizon.
One way to do this is age progress your face. Think about how you want your future self to be able to live with dignity. That can positively impact the choices you make now, if you keep your future self in mind.
Confidence: A way to increase your sense of confidence about handling whatever comes your way, is to focus your attention on things you can control. For example, think about a time when you felt completely in control (it doesn’t have to be about money). What were the circumstances? Remember lots of details around this situation.
Another thing to consider is your support network. Who are three people who have been there for you in the past during difficult times? Remembering that you have people in your corner can help you feel relaxed, and that can increase your confidence.
What are some times you have been resilient in the past? Focusing your attention on these positive experiences can have a positive impact on your financial well being.
And that seems like a darn good thing.