Money and mindset: how we can manage our money better

You recently published a book on the subject of financial wellbeing. What does this mean?
Financial wellbeing means that a person’s desired standard of living matches their financial resources. It’s about planning your own finances in such a way that they facilitate your wellbeing, both now and in the future. In a nutshell, it’s about achieving financial self-determination on the assumption that these days we can live to 100.

Does this require more than traditional financial knowledge, i.e. a basic knowledge of topics such as budgeting, interest rates, inflation or risk diversification?
Financial knowledge is important, of course. But the problem is that many people are familiar with the principles, but don’t know how to apply them. According to a recent survey, around 90% of people in Germany are aware of the importance of financial reserves and the need to handle debt responsibly. Almost as many also know that they should make private provisions for their retirement. Nevertheless, “irrational consumption” is on the rise, while almost a third are unable to cope with unexpected expenses, and only a minority are saving for the future. The situation is similar in Switzerland and France, where more and more people are getting into debt and, despite knowing better, only slightly more than half (Switzerland: 56%/France: 51%) are saving for their old age. We therefore need a more comprehensive form of financial education.

What do we need to do in order to develop a better way of handling money?
The decisive factor is the combination of “money” and “mindset”. We need a better understanding of how emotions, instincts and social influences frequently prevent us from making good financial decisions. We also need tools to help us translate this knowledge into specific action.

What kind of tools are you thinking of?
Navigating a century of life is primarily a mental challenge, with the financial aspects only a secondary consideration. There are some relatively simple rules of thumb for the financial challenge, such as the 50:30:20 rule. Here, 50% of your net income can be used for life’s necessities, and 30% for things that make life better – such as hobbies, holidays or Christmas presents. And we should invest 20% in our future, in debt reduction, savings plans or retirement provisions.

What mental challenges need to be overcome?
An awareness of our purchasing habits is crucial. Impulse buying is a classic example. According to a study by the EU Commission, 97% of online retailers use manipulative behavioural techniques such as games, prize wheels or discount countdowns. They suggest incredible bargains and encourage us to buy quickly. It’s important that we learn to understand these mechanisms and are thus able to rethink our purchasing decisions.

How can we prevent impulse purchases?
By leaving your credit card at home and deleting the card details from your browser when shopping online, for example. Or by saying to yourself before buying something: “I’m going to walk around the block and think about whether I really need it.” The main thing is to slow down. The tricks already mentioned target our instincts, and are intended to trick us into buying a product as quickly as possible without thinking too long about it.

To what extent do social comparisons influence our financial behaviour?
Hugely. And in the form of social envy, comparing ourselves with others leads us to spend money on things that we don’t actually need or can’t afford. A US study has shown that neighbours of lottery winners are more likely to go bankrupt. And the higher the lottery win, the more private insolvencies there are in the neighbourhood. We pay too much attention to external reference points when it comes to financial matters.

But comparisons can also be motivating?
Yes, but we should also be more conscious when comparing ourselves to others. For example, by asking ourselves why exactly we envy our rich neighbours – and why not. More conscious comparison also means comparing ourselves with people in similar circumstances whose lifestyle we admire. When faced with a financial decision, we might ask ourselves what this person would do.

Many people find it particularly difficult to save for their old age. Why is that?
On the one hand, from an anthropological point of view, humans are conditioned to think in the short-term and to survive. For millennia we were hunter-gatherers and were fully focused on meeting our existential needs. The concept of money has only been around for 4,000 years or so, and retirement for only 150 years. So it’s no wonder that we find it emotionally and cognitively difficult to think about the long-term when it comes to financial matters. Neurologically, too, we are reluctant to think long-term because we activate the intuitive, emotional and faster part of our brains much more often than the rational, logical, predictive part. This is also compounded by the fact that we do not naturally have a strong connection to our future selves.

What do you mean by that?
The behavioural economist Hal Hershfield found out that if we think about our future selves in 20 or 30 years’ time, it’s like processing information about a stranger for our brains. So if we want to encourage people to save for their old age, it’s almost like telling them to give their money to a stranger. For us humans, costs and benefits in the present are always more important than costs and benefits in the longer-term future.

So is it possible to learn long-term thinking?
Yes it is. We can train the predictive brain, much like top athletes do with mental training. When the tennis player André Agassi was asked what it felt like to win his first Wimbledon, he said: “I’ve already won Wimbledon 10,000 times in my head!” One technique I developed together with the University of Edinburgh is called “prospective hindsight”. In this, you imagine yourself in an ideal version of your future and think: how do I want to be living at the age of 40, 50 or 65? By imagining that you are already in the future and looking back at your current decisions, you can better anticipate the possible consequences and thus make more informed decisions in the present. This approach also helps you to gain clarity about the things that give your life meaning and enjoyment.

How much money does a person need to be happy?
Probably less than we think. As a rule, more money does not mean more happiness in life. In France and Germany, the financial threshold for general wellbeing is an annual net income of around EUR 35 000 for a one-person household, and CHF 50 000 in Switzerland. These are averages for the whole country, and the figure is slightly higher in urban areas and slightly lower in rural areas.

And what expenditure makes people happier?
Studies have shown that investing in experiences such as concerts, theatre trips or travelling is more worthwhile than investing in things. It has also been shown that helping others, for example through donations or volunteering, makes us happier in the long term. And anything that “buys” us time instead of “eating” into our time also makes us happy. So it may be wiser to invest in a robot lawn mower than in a swimming pool that you will only be able use for a few weeks a year, but will need to clean constantly.

What’s the most difficult thing for you personally on the road to financial wellbeing?
The major challenge of living to 100 is to live both in the here-and-now and for the future. That’s sometimes hard for me. My tip is to also include short-term goals in your financial plans that you want to achieve in the next 18 months. For example, I planned a few city trips in order to finally visit my best friends who I haven’t seen for a long time. Behavioural researcher Paul Dolan has a good phrase which also applies to financial wellbeing: “Happiness lost now is happiness lost forever”.