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Wealth creation is largely an elaborate process for most – at least for those who haven’t really amassed it (wealth) overnight. Though we don’t acknowledge it often – a financial cushion is simply not about building emergency funds. As integral a part of the wealth creation process that we are talking about, for us a “financial cushion” is created the moment we start talking about finance management or wealth planning.
As we go through the post in our quest for the less known ways with the help of which we can achieve our desired level of wealth creation, we will understand how important a role the sense of self efficacy ends up playing here.
How is the Concept of Self-Efficacy Linked to our Finances?
Yes. We don’t find ourselves understanding or rather discussing the psychology behind wealth-creation. And once we start doing that, we inevitably go back to Albert Bandura’s concept of self-efficacy, which actually goes on to determine a person’s thoughts, actions, motivation and behavior in the most powerful manner imaginable. He pointed out that people with a powerful sense of self efficacy are capable of viewing difficult tasks as challenges that need to be mastered in contrast to people with a weak sense of self-efficacy who view these same tasks as risks that should be avoided.
Since his revelations, financial experts at large have actually been trying to link the concept of sense of self-efficacy with finance. As Bandura had pointed out, self-efficacy is bolstered by various factors including:
- Experiencing success
- Controlling the emotional and physical responses
- Choosing good role models
- Reacting to encouragement
Why is it Important to Understand and Acknowledge the Role of Psychology behind Wealth Creation?
When it comes to financial success your sense of self-efficacy is definitely bolstered by your ability to pay off a large debt or for that matter staying away from expenditures on things you wanted to buy but didn’ need. Think about your friends early in their careers – living from paycheck to paycheck and often turning to the expensive quick loans in order to sponsor immediate needs. You are not required to do the same because you had planned your finances way before you had actually started earning. Do remember all these can act as major catalysts as far as laying the foundation of the sense of self-efficacy is concerned.
One of the most overlooked parts of wealth-creation is the psychology behind wealth-creation itself. The way we manage money actually has a lot to do with how we perceive our financial responsibilities. A lot is determined by the role models that we choose for ourselves. For instance, if we see someone in our family or friend circle fulfilling an almost impossible financial task, then we’re bound to be inspired to replicate the sense of self-efficacy. Additionally, a lot is dependent on the role models that we choose to be. The way we deal with our finances – or rather respond—to our pecuniary challenges from time to time- goes on to help us set examples for our kids as well. The need for prioritizing wealth management becomes a habit with them.
Understanding the psychology behind wealth-creation is important because only when you’re estimating your emotional reaction to certain financial responsibilities properly can you work towards changing them if needed.
For instance, today if you think that you will absolutely drown yourself in debts just in order to get out of your mortgage then you probably are someone with a very poor sense of self-efficacy. You can work towards developing a more positive change when it comes to the way in which you’re thinking about your financial responsibility now.
Besides mastering the psychology behind wealth creation, do make sure you are paying attention to these often overlooked aspects of this particular process.
How Often are you Replacing your Car?
You probably aren’t one of them who think that you should only change or rather replace your car when you NEED to! What we don’t realize is that every time we’re taking a loan from the bank to buy a new car the bank holds the title until we clear off the loan. Your car notably depreciates by 25% in the first year and by 50% in the next two years. Most of us end up trading our old car for new ones without even using the previous car optimally. However, we have already paid taxes, insurance, and loans on a depreciating asset. We might as well always refuse to acknowledge this but it’s only the car dealers who end up making profits in this case. There is a dire need on our end to stop selling assets too soon. You will understand how your efforts towards wealth creation will suffer owing to this habit of yours.
While saving remains a major financial goal at an early age—investing doesn’t. Ask most of the millionaires out there and they will actually tell you that investing is at the heart of prudent wealth creation. The tried and tested mantra in this regard is to subtract your exact age from 100 followed by investing the percentage of that number in equities and related funds including exchange traded funds, mutual funds and index fund.
How are you dealing with your Monthly Subscriptions?
Be watchful of your monthly subscriptions and your membership fees. While it feels great not to pay off all the dues at one go, do let us tell you monthly subscriptions and membership fees will eventually find you at the receiving end if you are not really keeping a check on them. There are so many times when even unused subscription fees end up killing your savings! Don’t underestimate the need for going back to or rather reviewing your subscriptions every month. If you are not using something do make sure that you are cancelling the same without fail. If you are prioritizing control over your expenditures you simply can’t ignore these subscriptions at any cost. Don’t pay up for what you don’t need. That’s perhaps the cardinal rule of personal finance management.