How to Become Wealthier in One Year
In today's culture, we're conditioned to seek instant gratification. Yet building wealth isn't something that happens overnight. It's often a lifelong process.
That doesn't mean, however, that you can't kick things into gear a bit. Devising a time-based plan is one of the easiest ways to jumpstart your wealth creation efforts.
So let's talk about why goal-setting works, and how you can formulate a simple yet powerful plan to become wealthier 12 months from today.
The psychology of goal-setting
We tend to think setting a goal is fairly simple. Just think about something you want, then work toward it, right?
Underneath the surface, however, there's much more going on. Neurologically speaking, our brains struggle to distinguish between what we have and what we want. When we decide to seek a goal, our brain immediately integrates the desired outcome into our self image.
In other words, our new goal becomes deeply intertwined with our brain's conception of our identity. And that's a development that can either work for us or against us.
If we're successfully working toward our goal, our brain's biochemical "pleasure centers" are activated. Dopamine is released, which makes us feel happy and motivated. Yet if we're failing to reach our goals, our biology hinders us. Our brains react to the failure to reach a goal in much the same way the loss of an important possession is felt.
And people hate losing possessions. A famous study published in the Journal of Economic Perspectives showed the power of this kind of loss. As part of the study, college students were given mugs. They were then offered chocolate in exchange for the mugs.
Researchers discovered that once students took "ownership" of the mugs, they were reluctant to trade them for chocolate -- even though these same students preferred chocolate over the mugs in a vacuum.
This principle is called the "endowment effect." You can see it at play in all walks of life. Studies have shown that stock market traders resist selling investments they own, even if they could trade them for assets they'd prefer to have, if they were starting from scratch.
Clearly, goals are powerful things. Setting the right goal, and successfully working toward it, motivates us and promotes a sense of well being. It affects us on a deep biochemical level.
Yet failing to reach a goal has potent psychological effects. Our self image takes a hit. Our brain reacts as if we've lost a valuable possession.
All of which makes picking the right goals even more important.
Action Plan: Taking Steps to Become Wealthier in 12 Months
Incorporating a time element when goal setting establishes a framework to measure progress. It also adds a bit of urgency. So let's review some steps you can take to significantly improve your financial position in one year.
- Boost your 401k contribution and maximize your employer match. This is free money, and there's no better way to improve your financial position than by claiming money freely given.
- If you don't have access to an employer-based account, open an IRA. Set up automated contributions from your checking account to your IRA.
- Take advantage of new technology. For example, there are apps available that will automatically save or invest the change you have left over from every retail transaction.
- Swear off "bad" debt for the next 12 months. Student loans are fine, but a 12-month freeze on credit card spending can work wonders.
- Work to improve your credit. Twelve months is a long enough period to make serious progress. As your credit score rises, your cost of living goes down, as borrowed money becomes cheaper.
- Pay off as much debt as possible. Focus on the higher-interest "bad" debt and start with your smallest debts first. By paying off even a small debt completely, you'll get a feeling of accomplishment -- and a nice dopamine boost.
- Don't be afraid to negotiate for a better deal. This might mean your salary, your debt or even your cable bill.
- Divert 25-percent of your discretionary income into the stock market. It doesn't matter where you cut -- just that you do. You can survive a temporary (and minor) dip in quality of life.
- When you invest, choose a low cost index fund.
- If you don't have an emergency fund, start working on building one. This can help keep you out of financially disadvantageous situations, such as taking a 401k withdrawal.
All of these goals have dual benefits. First, you'll benefit financially from reaching them. Yet even more importantly, you'll develop habits that are absolutely critical to achieving long-term wealth and happiness.
Remember, however, to start small and work your way up. Early success will help you tap into the body's natural reward system -- and enhance your odds of becoming wealthier in 12 months.