Every big and small decision we make in our daily lives has an impact on our financial health. From small savings to impulsive buying, all of it impacts your budget. Sometimes you thank yourself for your previous deeds and sometimes you repent. To put things under your control financial thinking and planning are necessary.
Developing a sense of your spending habits can be helpful if you are already not a billionaire. It helps you to tackle unforeseen situations like a champ and support your family.
Let’s understand more about financial thinking through this Financeals piece.
What is Financial Thinking?
In Business practices, “Financial thinking is essentially conceptual thinking. It involves abstract mathematical ideas and concerns economic interactions within a financial perspective of time.”
Although there are no formulas or graphs needed for an individual to develop financial thinking.
For a layman, Financial thinking is an approach to tackle future expenses when left with only limited resources. As an individual, you can not control future expenditures but with smart planning, you can curb it under desired limits.
Psychology has a big role to play in our spending habits and sound financial thinking is like a mental safety valve. It helps you to keep yourself under check when psychological factors come into play.
There are certain factors that impact an individual’s financial thinking.
Top 5 Factors Influencing Financial Thinking and Planning
There are micro and macro factors that shape your financial thinking in life. These are local factors that you may not even care about till now. Although they have a strong say in your life decisions. Let’s understand these 5 factors in brief
Age
Human desires and priorities change are pretty dynamic. It is safe to say their priorities command their financial concerns over a lifetime. In different walks of life, your spending habits change and so should your financial thinking.
As an adult, you will realize that responsibilities, income, and purchasing power are tightly knitted with each other. Although they never run together and keep crossing each other.
Personal Factors
In case you have a partner or dependents you are going to need solid financial thinking and planning in place. From groceries to their health and education you are going to bear it all since they look up to you.
Life changes drastically when you start seeing someone. You will start experiencing expenditures that never existed for you. But this is how it is. It may sound a bit harsh but a relationship is a financial responsibility that you are supposed to bear without any choices.
Additionally, in case you have dependent parents or siblings they are going to put a significant dent in your budget too. You are going to take care of a lot of things such as Life Insurance policies, medical bills, education, vacations, and so on.
So, managing your personal finances becomes even more crucial here since these are additional expenses that you didn’t even think of two or three years back.
Career Goals
What you want to become in life has a major bearing on your financial thinking. The income potential, the expenditure, the risk factors, time and future scope decide how your coming years going to be. And on similar lines, your financial planning will also be shaped.
If you decide to pursue a career that pays you well then you will find the field very competitive. The resources required to reach their such as educational requirements, travel, etc. will also be financially demanding.
On the other hand financial thinking and planning will be completely different for someone who wishes to become a businessman or an artist in the future. Their approach towards time, risk, earnings, and resources will be completely different.
Thus there can be no universal financial planning or thinking can be developed. it’s unique to every individual.
Health
It is a human tendency to take health for granted and not plan for it in advance. When we are young we tend to ignore when we see people struggling with health, falling stamina, and efficiency. Unfortunately, it happens with everyone after a certain age.
Short-term events such as birth, pregnancy, minor hospitalizations, and long-term illness like some accident, or disability can completely dismantle your finances. Financial planning for your ‘not so productive’ years helps you to put your unwelcoming health expenses in control.
So, developing financial thinking toward your health and well-being is equally important.
Living Expenses
This is one of those major aspects that may make or break your monthly personal finances. The factors like how you live, where you live, how you eat, and where you go are going to be reflected in your monthly budget.
Ideally, you should let your budget decide your lifestyle and not vice versa. If your pocket is allowing you to live a lavish life then go ahead. In the opposite case don’t get influenced by others living around and doing good financially as you will only put yourself under an unnecessary burden.
So, it is always advisable to plan finances in advance according to your lifestyle. Also, put at least 10% aside in case you believe in random trips or shopping sprees.
How to Develop Financial Thinking and Planning?
Developing Financial thinking and planning is going to be a survival kit if you have limited resources to run expenses. It is no rocket science but to develop it you have to be observant and keep track of your expenses daily.
Go through your previous monthly journal and try finding the heads where you spend most of the time. Then slice and dice it under different expenditure heads. Once you keep doing this in a few months you will understand where most of your money goes and what are the must-haves.
If your budget is limited then try cutting those additional expenses. Consider habits that promote savings and put aside a tiny amount every month for unwelcoming expenses.
Financial Thinking is a skill that you hone over time. You can not learn it in a classroom or training session. it comes with experience and observation. Initially, you feel it like a boring task but slowly and steadily it becomes a habit and you will be surprised with the amazing results.
Once you get a good hold on this skill you will see how those clueless monthly expenditure journals start talking to you. You will become your own financial planner.