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For the most part, creating wealth is an elaborate and complicated process, and does not happen overnight. Being financially stable and having a “financial cushion” is something the majority of people desire, I would say. But what many don’t understand is that a financial cusion is much more than simply an emergency fund. Building a financial cushion is an integral part to wealth creation and begins construction the moment you start talking about finance management or wealth planning.

As we go through this post, I hope to share with you a few lesser-known ways to achieve your desired level of wealth, as well as reinforce the importance of a sense of self-efficacy.

How is the Concept of Self-Efficacy Linked to our Finances?

We don’t often find ourselves discussing, much less understanding, the psychology behind wealth. But when we do, Albert Bandura’s concept of self-efficacy is inevitably brought into the conversation. Self-efficacy is basically what determines 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 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’t need. Think about your friends early in their careers – living from paycheck to paycheck and often turning to expensive, quick loans to meet their immediate needs. But thankfully, you started planning your finances before you started earning. Remember, this can be a major catalyst 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 and the financial role models we choose for ourselves. 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 their 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.

An example of poor self-efficacy would be, thinking that you will absolutely drown in finance when looking at your mortgage. If this sounds like you, you can work towards developing a more positive mindset towards your finances and take responsibility now.

Beyond mastering the psychology behind wealth creation, you should also consider some of these other aspects of the finance building process.

Investing

While saving is typically a major financial goal from an early age—investing is often put on the back burner. Ask almost any millionaire out there and they will actually tell you that investing is at the heart of wealth creation. A tried and true method of investing is subtracting your age from 100 and investing that amount as a percentage in equities and related funds including exchange-traded funds, mutual funds, and an index fund.

Monthly Subscriptions

Monthly subscriptions and membership fees are often hidden expenses that can kill your savings. While it may not feel great to pay off your subscriptions for the year all at once it can save you a lot of money in the long run. Don’t underestimate the need for going back and reviewing your subscriptions every month. If you are not using something, cancel it!!! If you find yourself wanting/missing said cancelled subscription, you can always reinstate it. Don’t pay for what you don’t need. That’s perhaps the cardinal rule of personal finance management.

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