Over the course of your life, you’ll have a variety of goals that you’ll build your wealth for, from buying your first home to saving for a comfortable retirement. But did you know that a simple change of perspective could make it much easier for you to achieve them?
As surprising as it might sound, using different language when making financial decisions can actually help you to build your wealth more effectively. With that in mind, find out what “nudge theory” is and three ways it can help you to reach your life goals.
You can use nudge theory to subtly improve your behaviour with small changes
While it was first identified in the 1990s, nudge theory was popularised in the late 2000s by economist Richard Thaler. Since then, it has been adopted in a variety of forms by governments and private businesses alike.
To put it simply, nudge theory is all about making subtle changes to influence people’s behaviour. While this might sound strange, it can be a useful tool for changing your habits. In fact, you may already do this without realising!
For example, doing some home exercises while watching your favourite TV show is an example of using nudge theory, as it bundles up something you may not want to do with something fun.
Even small changes like using different language can strongly influence the way you act, and you can use this to your advantage to build your wealth more effectively. With that in mind, read on to find out three different ways that nudge theory can help you to reach your goals.
1. Change the way you think about investing
During periods of high inflation, investing can be a great way to grow your wealth and reach your financial goals.
Despite this, only a small number of Brits invest in the stock market. A recent study published in FT Adviser found that half of people would prefer to keep their wealth in cash, rather than as investments.
As you’ll know, this isn’t always the most sensible option, but it can sometimes be tricky to break old habits and beliefs.
One of the biggest barriers that prevents more people from investing is that, while cash is seen as a “safe” asset, investing is heavily associated with risk. The study found that 45% of Brits are more worried about potential losses than gains when thinking about their finances.
If the prospect of investing makes you anxious, it can be useful to remind yourself that it is simply an alternative way to build your wealth.
While keeping your money in cash can be useful for reaching short-term goals, try to bear in mind that investments should be considered in the long term instead. And, while the value of an asset can fluctuate, over time the general upward trend of markets often negates any temporary dips.
2. Boost your rainy day fund
As you’ll know, when times are tough it can be incredibly useful to have an emergency fund to fall back on to help you keep your head above water.
But of course, when the cost of living is high it can sometimes feel difficult to put money aside for a rainy day. If you want to make it easier, it can be useful to think of it as an investment for the future.
As hard as it may be to part with a small portion of your cash each month, tell yourself that doing so can save a much larger amount down the line. This can help to make it easier to put money aside for when you really need it.
3. Contribute more to your pension
As you’ll know, pensions are a very useful and tax-efficient way to grow your wealth for retirement, which is why it’s important to make the most of them. If you want to boost your contributions, nudge theory can really help.
Thinking about pension contributions as “investments” rather than simply “savings” can give you an extra push to put more aside. Since the former has stronger positive connotations, this simple change of language can give you the nudge you need.
With the cost of living at a 40-year high, it can sometimes feel difficult to keep up your pension contributions, since that money is locked away for potentially decades. However, if you want to enjoy a comfortable lifestyle in retirement, it can be essential.
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The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.