Financial behaviour and financial decision-making are two closely related aspects of an individual's financial well-being. The impact of financial behaviour on the financial well-being of an individual has long been a subject of interest for researchers. Multiple studies study suggest that financial behavioural factors have a significant impact on an individual's financial well-being. Knowing and influencing these factors can help individuals improve their financial well-being over time. In this article, we will attempt to understand these factors and how we can influence them.
Understanding the terms:
Before we proceed, let us first try to understand the terms which we have been using in our daily lives without giving them much thought.
Financial Behaviour:
Financial behaviour is how individuals respond to the information obtained and take action in the form of decision-making. It refers to the way a person makes financial decisions, manages his money and deals with financial issues. This can be influenced by a number of factors like education, personal experiences, culture, personality, upbringing, income level, present financial situation and the influence of others on financial matters.
Financial Well-Being:
The way people feel about their financial situation can be considered as financial well-being. It is a state of being wherein a person can meet current and ongoing financial obligations, feel confident and secure in their financial future and be able to make choices that allow them to enjoy life.
Understanding the relationship:
As said, financial behaviour impacts the financial well-being of individuals. Studies have shown that individuals who engage in healthy financial behaviours, such as budgeting, saving, and investing, are more likely to achieve their financial goals and build financial security over time. Conversely, individuals who engage in unhealthy financial behaviours, such as overspending, impulse buying, and excessive debt, are more likely to experience financial difficulties and stress. Here are some specific ways in which financial behaviour impacts financial well-being:
Budgeting:
Studies have found budgeting is an essential tool to create financial stability and discipline. People who kept budgets were able to track their income and expenses, make informed financial decisions, and stay on track to honour their commitments and better achieve their financial goals. A recent study by the RBI found that only 31% of Indians have a budget. This suggests that there is a significant opportunity for financial education and awareness to improve financial budgeting behaviour in India.
Saving:
Saving is something found to provide psychological security and help boost your overall sense of well-being. Surely, saving is a very essential component of financial well-being and allows individuals to build a financial cushion to cover unexpected expenses as well as save for long-term financial goals. It simply involves setting aside a portion of income regularly. Saving money is a discipline that requires individuals to be committed and consistent. While in general there is a healthy savings culture in India, savings is something which can easily be influenced more by culture, personality and values.
Investing:
Investing is a way for individuals to grow their wealth over time by investing in assets that deliver higher net returns above inflation. Investment behaviour and decision-making have a sizable impact on financial well-being. The investment choices we make, especially the asset classes and the investment products go a long way in determining how much wealth we create. An individual's personal experiences, knowledge and interest in investments go a long way in shaping his/her investment behaviour. For eg., investors are ofen found to systematically hold on to losing investments far too long than rational expectations would predict, and they also sell winners too early.
Spending:
Spending is linked closely to your financial well-being. Studies show that poor control over spending is linked to materialism and status-seeking along with impulsivity and low self-control. Basically, one can also break this up into compulsive and impulsive spending. While impulse buying is largely unplanned and happens at the moment in reaction to an external trigger, compulsive shopping is more inwardly motivated. There are also instances where people were found to be addicted to spending. Overspending was found to lead to debt problems and financial stress.
Debt:
Debt is often closely linked to financial stress, stability and freedom of individuals. The credit behaviour in Indian society has undergone radical change both from the perspective of acceptance and access. With easy access, however, the debt burden on individuals has gone up significantly. Individuals who are mindful of taking credit and repaying the same on time can be expected to be closer to financial well-being than those who rely on debt as a part of life.
How to improve your financial behaviour:
If you are interested in improving your financial behaviour, there are a few things you can do:
1. Learn Personal finance
The more you know about personal finance, the better equipped you will be to make sound financial decisions. There are many resources available to help you learn about personal finance, such as books, articles, and online courses.
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2. Set Financial Goals
What do you want to achieve with your money? Do you want to buy a house? Save for retirement? Start your own business? Once you know what your financial goals are, you can start to develop a plan to achieve them.
3. Automate Savings and Investments
One of the best ways to ensure that you are saving and investing regularly is to automate your savings and investments. This means setting up a recurring transfer or say SIP in a mutual fund portfolio from your bank account to your investment account each month.
4. Get Professional help
If you need help with your personal finances, there are a number of professionals who can help you, namely Registered Investment Advisors and mutual fund distributors.
Conclusion:
Your financial behaviour has a significant impact on your financial well-being. By developing healthy financial behaviour, one can improve the financial situation dramatically and with time. As one learns, introspects and improves one's actions and behaviour, progress happens. What is needed is the right attitude to acknowledge and evaluate the problems and the possibilities out there. Even if we simply practice what has been mentioned in this article, that should be enough for us to get ourselves on track to financial well-being.
Disclaimer: We have taken due care and caution in compilation of this E Newsletter. The information has been obtained from various reliable sources. However, it does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions of the results obtained from the use of such information. Investors should seek proper financial advice regarding the appropriateness of investing in any of the schemes stated, discussed or recommended in this newsletter and should realise that the statements regarding future prospects may or may not realise. Investments are subject to market risks. Please read the offer document carefully before investing. Past performance is for indicative purpose only and is not necessarily a guide to the future performance. Remember, financial decisions should align with your goals and risk tolerance. Consider consulting a financial advisor for personalized advice.
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