Walking the talk in personal finance; doing versus knowing makes the difference

Personal finance isn’t much different from other goal-driven areas where the difference between achieving and not achieving boils down to distilling and applying both theory and behaviour.

Learning is essential, yes, but if you don’t act on any of that knowledge, it’s useless.

That was the hour’s topic at my latest appearance on NewstalkZB Collective’s Smart Money hour. Listen here.

When it comes to achieving goals in life, you’ll find a lot of parallels between personal finance and fitness.

Take losing weight.

Most of us know that to lose weight, you need a caloric deficit, or else you need to burn off the excess. Sadly, in a lot of cases, people end up gaining weight because they get discouraged too early and do the opposite of what they know they need to do.

Finance behaviours can be just as paradoxical. You know you could save more money by spending less or earning more but you get discouraged too quickly and do the opposite.

In both cases, people tend to fall into a psychological trap by putting too much pressure on themselves to succeed too early by taking on ambitious goals and then failing miserably.

Transformation doesn’t happen overnight and is seldom the result of any one change. Instead, it tends to be the product of a series of little changes over a moderate or long period.

Understanding that may go some way to helping people change their mentality around money and their financial habits. For inspiration, read James Clear’s “Atomic Habits.”  In his bestselling novel, he outlines several remarkable transformation stories that happened on the back of mico-changes implemented over time. Baby steps baby.

It is far less daunting to think about losing .5 kg instead of 15 kg over a month by making little adjustments that are easy to follow through with. Same goes for saving money, if you start with a goal of $50 verus $500 in a month you’re far more likely to succeed and then build on that success because you feel good about yourself.

When it comes to losing weight or fattening your bank account, the small is beautiful mantra may not be sexy, but it does work out much better in the end.

What can you do today to improve your finances?

Here are some suggestions:

1. Step up auto-payments so you don’t miss any payments and get a bad credit rating as a result.
2. Cancel any subscriptions you aren’t using (including the gym provided you aren’t punished for doing so).
3. Substitute a credit card for a credit-debit card and spend only the money you have.
4. Sell anything you have around the house you no longer use and use the savings to pay off debt if you have it or put it into savings in your KiwiSaver account or a parallel type investment fund that allows you earlier access than age 65.
5. Sit down and calculate your net worth (assets – liabilities)
6. Review your power companies, internet power and insurance to see if you can do better elsewhere.
7. Set some goals for yourself, professionally and financially.
8. Find out how much your KiwiSaver balance is, what fund you’re invested in and your contribution rate. Calculate (using Sorted.org.nz’s tools what you’ll have per week at age 65 and if it’s enough based on current settings)
9. Get a personal finance book (buy or borrow from the library)
10. Join an online forum where you can learn more about money and from others on a similar journey or who have been in your shoes.

Just one on this list is a good start. Try to make your way through the list over 10 weeks.