DALLAS, TX — The popular thought states that more money means greater financial freedom. On the contrary, several high-earning people still need to live from paycheck to paycheck, while those with smaller incomes accumulate wealth quietly. As more studies in financial psychology and behavioral finance prove, financial success depends far less on income and much more on spending habits, decisions, and mentality regarding finances.
Brennan Schlagbaum, a Certified Public Accountant (CPA), author, and founder of Budget Dog, is familiar with that personally. After managing to eliminate over $304,000 in personal debt as well as earning a net worth of seven digits in several years, Schlagbaum believes that the process of financial transformation starts with behavior, rather than income change.
“You are your own problem; therefore you are your own solution,” is how Schlagbaum describes the change of mind he underwent on his way to financial success; government as well as academic research also suggests the same idea.
Financial Psychology: The Reasons Why Intelligent People Make Bad Financial Choices
Many individuals believe that financial choices are based on reason, but the subject of financial psychology reveals another picture.
Financial choices are determined by factors such as emotions, childhood experiences, personal beliefs, stress, social influence, and habitual patterns of thinking. Long before a person makes a decision about saving, investing, or spending, the brain starts working in accordance with established behavioral patterns which have been formed throughout many years of repeated actions.
That explains the fact that people tend to know perfectly well what they are supposed to do, but cannot act according to their knowledge. The thing is that knowledge usually does not change a person’s behavior, while habits do.
Increasingly, scholars define financial health as the ability to combine financial literacy and behavioral consistency.
Government Research Reinforces the Importance of Behavior
According to the United States Consumer Financial Protection Bureau CFPB, financial well-being is defined not only in terms of one’s income and/or net worth, but in terms of actions and results: ability to manage daily finances, capacity to cope with unforeseen financial disruptions, progress toward financial goals, and freedom to make decisions without fear.
Remarkably, there is no income level specified here at all. Instead, emphasis is put on what allows financial resilience to exist.
Survey results from the Federal Reserve Board’s Survey of Household Economics and Decisionmaking (SHED), which tracks the financial situation of thousands of Americans every year, show similar results. The survey continues to prove that households from various economic backgrounds face difficulties related to the issues of emergency preparedness and financial resilience; high income does not guarantee financial stability.
Research results from the National Institutes of Health (NIH) prove that a sense of financial control does bring positive benefits when it comes to improving quality of life. In other words, such financial control implies that individuals with a feeling of financial control tend to be financially confident no matter how high their income is. These research results point at an important conclusion is that while income creates possibilities, behavior determines the effectiveness of their utilization.
Money Habits and Their Impact On Financial Results
Financial habits develop through practice. Each spending choice, saving deposit, investment, and budget decision reinforces the habit that eventually becomes automatic. Over the years, people stop thinking of how to manage their finances and act according to their habits.
This is also the reason why changing people’s financial behavior can be difficult at first. The human brain prefers the familiar mode of action, even if it is harmful for long-term goals.
As Schlagbaum explained, the process of achieving financial independence starts with replacing wrong habits with the system which supports proper financial behavior.
“Money does not increase the level of self-control,” he states. “It does not make people more disciplined. It simply makes people act according to their habits.”
Behavioral Biases Quietly Influence Everyday Decisions
Behavioral biases are at play in the everyday choices people make when it comes to their finances. Behavioral finance has identified several cognitive biases that influence money matters.
- Present Bias leads to immediate satisfaction and makes it hard to favor long-term savings against short-term spending.
- Loss Aversion makes people more afraid of losing money than appreciating what they gain, so emotions take over during tough economic times, and people act emotionally when the market conditions are uncertain.
- Lifestyle Inflation slowly increases the amount a person spends with any increase in income, making it hard to convert any salary increases into money in the bank.
These biases apply to everyone, no matter how smart they are or how well they understand money matters.
“Brains tend to seek safety and stability,” says Schlagbaum. “Our goal is not to get rid of our emotions but to have a system of making decisions that would not allow emotions to rule every financial decision.”
A Better Decision Framework: Systems Over Willpower
One of the biggest misconceptions in personal finance is the idea that success relies on discipline. According to behavioral psychology, the truth is quite the opposite.
Willpower is a limited resource, which gets exhausted by the end of the day when one has to make countless decisions. Instead of urging individuals to use self-control constantly, Schlagbaum says that it is better to cut down on the number of decisions.
His system revolves around four guiding principles:
- Allocating a purpose to each dollar using zero-based budgeting before the start of the month.
- Using automation in savings and investment so that financial improvement takes place before spending.
- Setting up boundaries for decision-making, like waiting 24 hours before buying anything non-essential.
- Reviewing progress in financial management in order to make minor adjustments before things go wrong.
Such systems ensure that financially sound decisions are made repeatedly rather than occasionally.
Building Better Systems Creates Better Financial Outcomes
Behavioral finance consistently shows that true financial success is not achieved by a single great investment choice or even a substantial increase in salary.
This is done by making hundreds of smaller decisions on an ongoing basis.
Automated processes eliminate spontaneous expenditures. Budgeting takes away decision exhaustion. Financial tracking eliminates accountability.All this leads to replacing impulsive financial actions with well-thought-out ones.
For Schlagbaum, this difference between motivational approach and constructing effective systems is the key distinction between short-term improvement and true financial independence.
“Income brings opportunities. It is the systems that turn these opportunities into real financial success,” he says.
Why Does It Matter Now?
With continued financial pressure, growing cost of living and increasing household debt, continue to affect families across the country; understanding the psychology behind money has become increasingly important.
Government organizations, financial educators, and behavioral scientists all come to the same conclusion that improving the financial situation is not only about making more money; it is also about learning how people think about money, how people ignore financial biases, as well as developing systems that promote better financial practices.
Financial independence is a psychological accomplishment first, then a financial one.
The people who understand their money-related behavior, create a better model for decision-making, and design systems ensuring the continuous process of money behavior usually become the ones who gain wealth, not because they earn the highest income, but due to their unique way of thinking about money.
About Budget Dog
Budget Dog, created by CPA Brennan Schlagbaum, specializes in financial education with an emphasis on budgeting, debt management, investments, and building wealth automation systems. Schlagbaum is the writer of The Roadmap to Financial Freedom: A Millionaire’s Guide to Building Automated Wealth and offers various tools that can be used to build better money management habits and financial confidence. Readers can also explore Budget Dog’s financial education videos covering budgeting, investing, debt elimination, and wealth-building strategies.
For additional financial insights and updates, readers can follow Brennan Schlagbaum on X; you can also visit the official website https://budgetdog.com.
Note: Please note that this article does not offer financial, investment, legal, or tax advice.
