Mastering Money: Why Financial Success is 80% Mental and 20% Strategy

Which do you think is more important?

Often, we focus on the numbers in our financial lives without truly understanding the behavioral aspects behind them. Common behavioral finance issues include loss aversion, consensus bias, and familiarity tendencies.

The 80% that's mental can be considered the following:

• How you view money
• How your parents used money
• Your rational thinking on spending
• The emotions you have around material items
• Herd behavior: "Someone else has bought it and likes it, therefore I need it"
• Want-based spending vs. need-based spending

Identifying your financial blind spots is the beginning of long-term financial success.

How you handle your money leads to most of the success you have with your finances. What you do with your money in terms of investing and where to put it to advance your net worth and financial success is only a fraction of the equation.

Let me give you an example of some clients of mine who had already conquered the 80% mental aspect of their habits and lifestyle and needed help understanding where to put their money.

John and Sarah have two young boys and a bright future ahead. John is in IT security, and Sarah is in a marketing role. Together, they bring home over $245,000 a year and want to be successful with their money, but they need to start now.

Three things we did to help structure their finances based on the 20% of what to do:

1. We set a budget that gave them parameters to spend their money as they saw fit within a given range.
2. We automated investments into their Roth IRA, 401(k), and brokerage accounts.
3. We set future goals for a house purchase that would be their dream home, as well as smaller purchases such as cars and paying off debts along the way.

They had roughly $50,000 a year they could allocate as they desired. The 80% was understanding that they had to do it the right way and get their spending habits under control. The 20% was deciding where to put the money and what to do with it to accomplish their goals.

They achieved everything they wanted in the short term, which will lead to financial success in the long term.

If you or someone you know is trying to understand what to do with their money or where to put it, I would welcome the opportunity to help guide their financial future.