How behaviour determines your bank balance

The trick lies in a little-understood practice shared by wealthy and financially healthy individuals all over the world: healthy money behaviour.

What is behavioural banking?

Behavioural banking comes out of something called behavioural theory; a branch of psychology known as Behaviourism. Behaviourism asserts that people’s actions stem largely from entrenched habits.

These habits are formed as a consequence of whatever social or life lessons they have subconsciously drawn from the experiences they’ve had.

So, for example, a child watching their financially cash-strapped parent put only a small amount of fuel in the car growing up may themselves grow up into someone who seldom fills their petrol tank, but instead puts in small amounts several times a month, despite this being impractical.

The theory shows that people are not inclined towards rational choices. This leads to many of the issues which they experience today – including financial ones. Studies show that changing just five simple behaviours can have a massive impact on financial health.

It’s important to recognise that these same five behaviours, if left unmanaged, are linked to three risks that lead to 80% of the reasons why people do not meet their financial obligations.

Behavioural banking, then, changes behaviour over time, both by rewarding good behaviours, and by making it more difficult to indulge in bad ones.

How does someone ‘learn’ better banking behaviour?

The good news is that, just like the habits of being polite or driving safely, smart banking practices can be learned. Discovery Bank has whittled it down to five behaviours:

• Manage your debt by spending less than you earn

Spending less than you earn avoids getting into debt, which costs far more than many realise. Most debt repayment actually pays off the interest of the debt, meaning you are paying more than the actual monetary amount you borrowed.

• Save regularly and have sufficient savings

People who are in the habit of saving regularly at the start of every month tend to have larger emergency savings balances; are better able to cope with the financial challenges of unforeseen life events; and have a higher financial health score than individuals who save what is left over at the end of every month.

• Insure against life’s surprises

Insurance is widely considered a grudge purchase in South Africa – why spend money on something for the future that I may never use, when I could use it to enjoy myself now? Yet life setbacks, such as unexpected health problems, car accidents and unforeseen tragedies, happen regularly. Without insurance, this has the ability to either wipe out what savings you do have or, worse, trap you in a vicious cycle of debt.

• Invest for retirement

Those with bad financial behaviours display the thinking of ‘I’ll think about later, later’ and don’t put away savings, no matter how small, for the long-term so that they can be ready for retirement at a reasonable age. What they don’t realise is that they are missing out on compound interest. Instead of investing far less money which grows far bigger over time, they end up spending ten times the amount later – with all the added stress – to fix problems, like not having enough to retire or send their child to university.

• Pay off your property

Property is a great, appreciating asset, and getting a bond is one of the few 'good debts' you can have. But just like any other form of loan repayment, a large portion of that bond is just interest – and is often as much, or more than, the actual property's value.

All these behaviours, when combined and used consistently over time, can turn almost any financial situation around and provide both security and abundance, from getting out of debt to saving up enough for retirement.

Visit the Discovery Bank page for more information.

This article is meant only as information and should not be taken as financial advice. For tailored financial advice, please contact your financial adviser. Discovery Bank Limited is an authorised financial services and registered credit provider. Registration number 2015/408745/06.