How Mental Shortcuts Are Secretly Shaping Your Financial Success (or Failure)

By Simon Russell

Our brains are susceptible to certain automatic thought patterns, and fighting against them can be a challenge at the best of times. Sometimes, the solution is to ask how we can align ourselves with these thought patterns so that they actually help us rather than hurt us.

Below, we look at some of the mental shortcuts people often rely on when conducting their financial affairs, and whether we should use them more often or discard them altogether.

Mental shortcuts that might not serve us well

“Retirement is too far away to worry about now”

We’re probably all guilty of putting some things off, but when it comes to retirement planning you might really be doing yourself a disservice. Yes, it can be tough to think seriously about something that might still be far away, but the good news is that there are things pre-retirees can do now that can have a massive impact, like making extra super contributions. This goes doubly so if you’re younger, considering you’ll have several decades for compound interest to work its magic.

“I need to have a detailed budget or retirement plan”

Most people don’t have the time or inclination to apply such a fine level of attention to their finances, and at the end of the day the effort required can risk putting you off the entire endeavour.

Here, it might help to start with easy stuff and not try to put undue barriers in front of you. Think about ways you can automate your finances, like setting up an automatic monthly deposit from your salary into your super or emergency fund. You don’t need a budget for that—it’s just a matter of putting something in.

“I don’t have any spare money so there’s not much I can do”

Rising costs of living are taking their toll on many households. But there are things you can do to bolster your finances that don’t require you to save a cent more. Changing your super from a low growth to high growth option, if that suits your circumstances, is just one example.

Another is adjusting the level of insurance you have. Even if you increase your insurance, this doesn’t necessarily cost you anything out of your cash flow—it could come out of your super—and while it would reduce your super balance, it could significantly reduce the risk of your family becoming destitute in the event of your death or permanent disability.

“What is familiar is best”

Many people don’t think this explicitly, but a glance at our investment strategy often reveals how much it informs our thinking. Maybe we’re focusing on one asset class (such as property) to the exclusion of others, or maybe we’re limiting our share portfolio to Australian companies because we don’t know much about the international scene.

Here’s where small amounts of financial education can help. You don’t need to become an expert in a particular asset class—you just need to increase your familiarity with it. When it comes to shares, that might be as simple as looking into a fund’s holdings and seeing how many names you recognise.

Mental shortcuts that can benefit our finances

“Do nothing”

This might seem counterintuitive, but so long as you’ve got the basic fundamentals sorted (e.g. your super is set to a suitable investment option, you have an appropriate level of insurance, and you have automatic contributions set up), then it’s often a worthwhile approach.

Of course, you’ll need to review things if your circumstances change. For example, if you start a family you might need to adjust your insurance, and if you get a pay rise you might be able to make larger contributions to your super or mortgage. But after you've done those few basic steps you probably won’t need to stray too far from the original plan, at least until you get close to retirement.

“Don’t pay too much attention”

If you’re looking at the stock market every day, occasional losses that are part and parcel of investing might make you jittery. And any hasty decisions you make in that anxious state, such as switching all of your superannuation into your fund’s cash option, might prove disadvantageous over time.

You might be better served by paying less attention to some of the noise (that is, the stuff that is happening in the short-term that often has a high degree of uncertainty) and more on the longer-term, slow-moving, unexciting things, like the average return on the All Ordinaries Index over the last 30 years.*

*Remember that when making investment decisions, past performance isn’t a guarantee of future performance.