You may have encountered the growing frequency of references to “mindfulness,” broadly defined as a practice of focusing intently on the present moment, observing one’s current circumstance without evaluation or judgment.
It has its roots in Buddhist and Hindu teachings and was introduced in America during the 1970s as a pain management technique. In a world of increasing complexity and stress, the practice of mindfulness has been shown to have tangible emotional and physiological benefits, so much so that an increasing number of major companies like Google, General Mills, Intel and AstraZeneca are offering mindfulness resources and training to their employees.
Mindfulness is increasingly being applied to money management. Specifically, “financial mindfulness” is gaining currency as a valuable complement to the quantitative side of planning and investment as part of a more holistic approach. The practice is emerging as a useful tool in dealing with stress and emotional biases, reducing the likelihood of falling into some common traps and promoting a greater sense of wellbeing.
Researchers at Georgetown and Cornell universities have authored an important paper providing evidence that mindfulness applied to money decisions produces tangible benefits. They note that personal finances are the leading source of stress for most Americans that can impede rational decisions. For example, financial stress can cause some people to avoid potentially bad news or negative reports, a cognitive bias sometimes called the ostrich effect. In the extreme, financial stress can lead to depression or even suicide.
The researchers had noticed a surge in financial products, blogs and apps that purported to offer financial mindfulness utilities and advice, but that a consistent definition was lacking, and the content was varied. They set out to design a series of studies to create a meaningful scale to measure an individual’s financial mindfulness.
The first order of business was to settle on a definition. Their review of the nascent literature led them to adopt a two-dimensional construct of financial mindfulness as “the tendency to be highly aware of one’s current objective financial state, while possessing an acceptance of that state.” They then refined their surveys to include four statements each along the two dimensions and asked participants to rank their responses from 1 strongly disagree to 7 strongly agree.
The first dimension, awareness, parallels traditional financial literacy: an up-to-date knowledge of a person’s financial position including things like bank balance, investment accounts and debt obligations. Statements designed to measure awareness included: “Every month, I review spending on my credit cards and debit cards,” and “I know almost exactly the total of money I have across my bank and investment accounts.”
The second dimension is less quantitative and more psychological: acceptance. This involves acknowledging one’s present financial condition without judgment or angst, helping them to make financial decisions without being swayed by emotions and biases. Money anxiety can lead to a sense of powerlessness, frustration or anger that can impair good decision-making. Statements included: “I cannot look at my credit or debit cards statements without having my emotions take over,” and “When something changes in my financial life, I frequently react irrationally or inappropriately.” Awareness promotes the ability to mitigate emotional reactions to stressors.
The paper reached some interesting if somewhat intuitive conclusions. Individuals with high financial mindfulness scores (high awareness and low reactivity to stressors) tended to have better credit scores. They were generally willing to take on more investment risk and accept the inevitable cyclical declines in markets and were less inclined to financial avoidance, ignoring their finances during difficult times.
High financial mindfulness was also found to decrease the odds of succumbing to the sunk cost bias, the reticence to dump a bad investment and recognize a loss. Human nature impels us to hang on to a loser until we get even, while the rational decision is to ignore the past and evaluate an investment strictly based upon its future potential.
Interestingly, financial mindfulness was not highly correlated with wealth. Even though wealthier individuals might experience fewer financial stressors (or less existential ones), their mindfulness scores were not materially different in the aggregate from people with fewer resources. Cognitive biases do not respect income.
While the mindfulness scale developed by the researchers is primarily intended to advance academic investigation, there are things we as individuals can do to improve our financial IQ. A starting point might be to get in touch with your own “money personality,” your innate, fundamental attitudes toward money and its use. Morgan Housel’s book “The psychology of money” is worth a read and chock-full of insights. You can also find online quizzes to help you assess your attitude toward money. The Khan Academy and NerdWallet offer helpful resources.
Building awareness can include simple acts like tracking weekly spending and categorizing where the money goes. Cultivating acceptance is more challenging but can include tricks like the 10-minute rule: Pause before buying to reflect on the necessity of the purchase and how many hours you would need to work to pay for it. Setting specific goals can also help in staying focused on the longer run. Also finding someone you trust with whom you can discuss your financial situation can be extremely helpful.
Mindfulness has become something of a buzzword over the past few years. But the application of its practices, including with your finances, has been demonstrated to improve mental and physical health and financial wellbeing.
Christopher A. Hopkins, CFA, is a co-founder of Apogee Wealth Partners in Chattanooga.
