How to make better money decisions

Savings can be maximised by analysing spending habits, setting goals and adopting systems to better guide decision making, says Max Phelps.

Max is the author of Spending, Fast and Slow, a book that focuses on helping investors take control of their spending habits, maximise their savings and ultimately live by design.

He revealed to KnowHow’s Bushy Martin on Property Hub’s Get Invested podcast the key ‘thinking’ systems which lead to better financial decisions.

Money Decision 1: Understand Fast Thinking vs Slow Thinking

There are two key thinking systems that drive human decision making, especially when it comes to money and spending. The first one is ‘Fast Thinking’.

“It’s intuitive. It allows us to make quick decisions. We need to be able to do that. As humans, we don’t need to sit and analyse a problem. If there’s a sabretooth tiger coming for us, we need to hide, run or fight. We don’t need to sit there pondering which of those is the best thing to do. Pick one, do it, and you’ll survive. And so as human beings, we have the ability to make these fast decisions, and over 90% of the daily decisions we make are made fast. They’re made just on assumptions that this is probably okay,” Max said.

In comparison, the second type is ‘Slow Thinking’.

“This is the slow, deliberate style of thinking, which is when we’re analysing things. And the best thing when thinking about this, in terms of when we’re spending money, is when are we going to buy a house? We tend to spend a lot more time and effort looking into it, thinking about it, and analysing the properties and understanding how it’s going to work,” he explained.

“That’s a slow decision, whereas spending $4.50 at Maccas on the way home on a portion of chips, that’s a very fast decision. We assume it’s probably fine. But the problem is that when we add up all those fast decisions from a money perspective, they add up to more than we spend on the stuff we think we’re spending our money on.”

Money Decision 2: Break down your spending habits

Investors need to break down exactly how much they’re spending per month, what they’re spending on, and whether it’s through their savings or via a credit card.

“Now I’ve probably had this conversation thousands of times where you say to people, excluding the rent and the mortgage, how much do you spend each month? And they’ll go, a couple thousand dollars. And they’ve gone, ‘oh this is my electric, my gas, council rates, water rates, phone bill, insurances, groceries, and then add a little bit for entertainment’. And I’ll go, ‘that’s interesting because, according to the bank, the household expenditure measure says that for a household your size, you should be spending about $3,500. So it seems like you’re spending really low’. Now, I ask another question – ‘how much do you put on the credit card?’ And they’ll go ‘oh, it’s about $4,000’. So people are thinking they’re spending $2,500 of their savings, but they’re actually spending $7,000 a month,” Max revealed.

It’s also about identifying the ‘invisible forces’ and money traps which shape financial choices.

“There are opportunities to buy stuff absolutely everywhere. You look at impulse shoppers. Now, the interesting thing there is, we think for example, ‘oh my wife’s an impulse shopper, she’ll just go and buy a pair of shoes on impulse’. But what about the guys that spend $4 on a soft drink? You can drink from a tap for free or spend $4 on a soft drink and you go, ‘but it’s only four bucks’. But if you do that twice a day over the course of a month, that’s not $4 anymore. That’s $240 a month. That’s probably as much as she spends on the shoes or whatever. And so it’s those little things that add up,” he said.

Money Decision 3: Budget with a purpose

The best way to control finances is to establish a budgeting plan. However for Max, there is no point in budgeting if there isn’t an alternative use and purpose for the money.

“If you haven’t set yourself any goals to save up, to buy a home, to pay the home off, to save up for an investment property, or save up for a lovely holiday, then there’s no point in anything. So we always start off with the goals, and once you understand the goals, then you’ve got your basic premise of money landing in an account you can’t touch. You get money every week, and then money goes towards the goals,” he said.

“Then you have a separate account for your holidays and a separate account for the car and a separate account for the future, or the investment property, or whatever you’re doing next. The more you separate those things out, the easier life becomes. We also found that if you only manage money week to week, you feel broke. And if you feel broke 52 weeks of the year, you end up dipping into the other buckets.”

Money Decision 4: Embrace delayed gratification

Max recommended writing lists as an exercise for both budgeting and providing a positive feeling of satisfaction and achievement.

“Typically what happens when you buy something, you get this surge in dopamine when you buy it, and then afterwards you start to go, ‘oh what’s my partner going to say about that? Or should I have done that or do I really need it? And what if it doesn’t fit? And what if I don’t wear it or what is not right?’ And so you get this deep dive into the pit and then you end up feeling worse,” he said.

“So one of the best things that you’ll ever do is write a list of things that you’re thinking about buying. And then when the first of the month rolls around and your money has landed, you go, ‘oh well I’ve still got the new iPhone on the list, and I’ve still got this and that. Which one of those am I going to choose?’ And that now is engaging system two (slow thinking). We’re now thinking, which one do we want? Which one do we think we’ll get more value out of? And what happens is, you might have ten things on the list and pick four, and then you might leave the six on the list. But if you leave something on the list for two to two months, you then go ‘this is never going to make the cut, I’m not going to buy it, who am I kidding?!’ And you cross it off.”You, then go. He’s never going to make the list. He’s never going to make the cut. He’s never going to get to the top. I’m not going to buy it. What am I kidding myself? Cross it off.”

Bushy added: “It’s such a simple exercise that has immediate benefits, but it’s building in that thinking system that most people don’t get around to”.

Listen to the full interview here.

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