Discover more from Making of a Millionaire
Does Strong Self-control Lead to Better Money Outcomes?
Here's how you can learn financial self-control
Every time you leave your house or go online, nearly everyone is trying to get you to part with your money.
There’s nothing wrong with spending money as long as you spend money on things that make your life better and you can afford.
The problem is that we are constantly bombarded with advertisements and social media-induced FOMO that lead us to spend too much money on things that provide too little value.
In today’s world, self-control is a financial superpower.
Continue reading to learn;
How self-control is essential in personal finance.
Strategies to increase your self-control
How self-control can reduce anxiety and increase confidence about your money.
Why self-control is critical for financial success
A 2017 paper written by Strömbäck Et al. surveyed over 2,000 people to measure if their financial behavior and financial wellbeing was linked to “self-control”.
The researchers describe self-control as “our ability to break bad habits, resist temptations and overcome first impulses”.
They found that people with good self-control are more likely to:
Save money from every pay check.
Make better financial choices.
Feel less anxious about money.
Feel more secure about their financial situation.
How self-control can help you save more money
Why does anybody save and invest in the first place? Economists would say saving and investing allows us to transport consumption today into the future. Investing = a time machine for your spending.
Taking $100 today and sticking it in a savings account means you can’t spend that money right now. But, saving $100 today allows you to spend that $100 in the future—perhaps during retirement or a period you aren’t working.
Of course, we know the things we want to buy will cost more in the future due to inflation. We also know that the interest savings accounts pay is unlikely to keep pace with inflation. That’s why we invest in riskier assets like stocks which have a long track record of outpacing inflation.
The idea is investing $100 today will allow you to spend more than $100 in the future, even after taking inflation into account. You take money today, throw it in the investing time machine, and a few decades later, you meet up with that money to buy things without relying on a paycheck.
Financial self-control is so important because saving and investing means prioritizing your future self over your current self. You’re not spending money today so that your future self can spend that money. Since our future self is an abstract idea, most of us prioritize our current self. If I don’t save for retirement, that’s not “my” problem; that is “future Ben’s” problem.
Today’s newsletter is brought to you by— You Need A Budget (YNAB)*
You Need A Budget (YNAB) is an award-winning personal finance software and proven method to gain total control of your money. YNAB teaches four simple rules that show you how to stop living paycheck-to-paycheck, get out of debt, and save more money!
Look, YNAB is the king of budgeting apps for a good reason. Their system works; the average new budgeter saves hundreds in their first month and thousands in their first year using the YNAB system.
If you struggle to build or stick to a budget, YNAB is worth your consideration.
It takes self-control to resist spending money today
Think of what it feels like after a long stressful day at work. Your boss chewed you out, you’re behind on your project deadlines, and road construction added another 30 minutes onto your commute home. When you get home, you have to feed your kids, and you’re left with two options:
Order in which after delivery fee and tips can easily cost more than $60.
Make dinner yourself at a fraction of the cost.
It takes a tremendous amount of self-control to resist overspending on ordering in when the last thing you want to do is stand in front of a hot stove after a long day.
Self-control can help reduce financial anxiety and increases confidence
Money not only impacts what we can buy and how we can spend our time; it also has a massive impact on our psychological wellbeing. Financial problems is often cited as one of the leading causes of stress, anxiety, and even divorce.
Strömbäck Et al. found that after controlling for income, age, sex, education, and financial literacy, people with a high level of self-control were more likely to feel confident about their current and future position and less anxious when thinking about money.
To summarize, a high level of self-control can help someone:
Save more money
Make better financial decisions
Feel confident in their future
Reduce their level of anxiety
It stands to reason that most of us would live a happier, richer life if we could increase our level of self-control. But is it possible to do that? Is self-control something we are born with or something we can learn?
How to increase self-control
In 2021, Davydenko Et al. published a meta-analysis to aggregate the research of financial self-control strategies across 29 academic studies to determine how effective they were at helping people save more and spend less.
Self-control strategies are a broad concept and can include just about anything you might do to avoid the temptation to overspend.
The researchers break down several different types of self-control strategies, but to simplify their findings, you can think of two strategies to implement financial self-control.
Proactive strategies which focus on what you can do to avoid tempting situations to overspend in the future.
Reactive strategies which focus on what you can do to avoid overspending once you are in a tempting situation to spend.
They found that proactive strategies tend to be more effective than reactive strategies.
This is an unsurprising result; how often have you been told it’s better to be proactive than reactive? Well, I am telling you again but with data to back up that claim.
Think of it like dieting. A proactive dieting strategy would be to avoid keeping any junk food in the house. By being proactive, you reduce your reliance on “willpower” to avoid temptation.
In the context of saving money, think about situations where you will be tempted to overspend and think of a strategy to avoid that ahead of time.
Let’s say a group of friends want to go out for dinner. This is a prime situation where you will be tempted to overspend. To avoid paying marked-up costs at a restaurant, maybe you offer to host a dinner party and ask each guest to bring an individual item. Someone brings a bottle of wine, another person brings dessert, and you cook the main course.
That’s an example of a proactive strategy to practice financial self-control. Anticipate a situation where you will spend too much money and plan to avoid it.
An example of a proactive form of financial self-control to help you save more money would be to set up an automatic savings plan.
Let’s say you did some planning and figured out you need to save $800 per month to be able to retire at 65—or whatever age you’d like to be able to stop working. The proactive strategy would be to call your bank and set up an automated transfer of $800 from your checking account on the same day each month (or $400 twice a month).
Automating a savings plan does remove temptation from the equation. This again highlights the fact that the best way to practice self-control is to remove tempting situations altogether rather than trying to rely on willpower to make the right decision.
The downside of proactive self-control strategies is that they rely on a lot of planning and thought ahead of time.
But good news, if you are subscribed to this newsletter and made it to the bottom of this post, you are already thinking about how you can use money to live your best life.
Now it’s time to turn those thoughts into a plan and execute it.
Do you have a proactive financial strategy that has worked for you in the past?
Is there a particular situation where you struggle to resist spending or don’t save as much as you should?
Leave a comment below, and let’s talk about it!
Help Build A Community-Focused Financial Media Firm
Making of a Millionaire has one mission; to help you use money to live your best life.
To do this I….
Help you identify and avoid the Financial Bull$it scattered across the internet.
Provide rational ideas on how to make, manage & invest money.
Build a community of like-minded and supportive people walking their own financial journey.
If you are a paid subscriber, please stand up wherever you are and take a bow; My failure as a writer is that I’ll never be able to properly articulate what your support means to me.
If you are a free subscriber, please consider supporting our work and gain access to exclusive articles, books, and educational resources by becoming a paid subscriber.
If you recently lost a job or are experiencing financial hardship, send me an email, and I’ll comp your subscription for a year.
Do you know someone going through financial hardship? Go ahead and gift them a subscription.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.'
*Disclosure: I do receive a commission when people sign up to YNAB using my affiliate link*