Research from 2023 concluded that 36% of Americans earning $200k or more and 48% earning $100k or more are living paycheck to paycheck. This begs the question of why the supposed “rich” are experiencing this level of financial strain as well as the general population? A paycheck-to-paycheck lifestyle means that you only have enough income to cover your essential costs, such as housing, utilities, groceries, insurance, healthcare, taxes, and clothing. This lifestyle makes it impossible for a family to save or invest, leaving many feeling a constant strain on their finances and ultimately on their livelihoods.

Lifestyle inflation, also known as lifestyle creep, is a phenomenon explaining that as your income increases over time, so does your spending. When you get a raise, instead of putting that money into a savings account or emergency fund, you spend it on a vacation or a high-end wardrobe. Lifestyle inflation seems to happen unconsciously based on the assumption that increased income always translates to a higher standard of living. This experience is natural, but if not managed can lead you far away from where you want to be and what your financial goals are. A sign that lifestyle creep may be present in your life is a stagnant savings account, due to limited ability to save. You may notice decreased financial flexibility when emergency expenses, such as auto maintenance or medical expenses, inevitably arise. When you are constantly funneling your finances towards maintaining a higher lifestyle, you lose vision of your financial goals, because you are trapped trying to make ends meet. If lifestyle creep is prevalent, you probably do not keep a budget and you have a general sense that you are out of control of your finances. The majority believe that the reasons for living paycheck to paycheck include high monthly bills, lack of budgeting and planning, unexpected emergencies, and increased cost of living. Genuine growth is possible if we begin to see these factors as not something that is happening to us, but as something we can change.

What could it look like to combat and prevent lifestyle inflation? I think a great first step is creating a simple budget. Visualizing your financial situation through a budget can be very powerful in seeing what needs to change, what you value, and how you can move forward to financial stability. Budgeting is effective in managing debt accumulation, saving for future goals, and building a cushion for unexpected events of life. Another step towards living within your means is automating savings. Technology allows you to set up automatic transfers into your savings or investment accounts. This is a proactive step you can take that makes your life easier. Another step you can take is living below your means. We must actively choose to not upgrade our lifestyle with every pay increase. Setting financial goals is another proactive step to take, helping you to align your long-term dreams with your current spending and saving patterns. These goals will serve as a reminder for why you are living within your means, saving money, and integrating financial disciplines into your life. Lastly, mindful spending is a great practice to learn for financial peace. Mindful spending consists of intentionally considering every purchase and comparing them to your financial goals.

Lifestyle creep does not only happen to those making six figures, but it can happen to anyone. Financial health requires sacrifice, whether that looks like cutting back on your coffee budget or moving to a less expensive neighborhood. But no matter who you are or what you do, it is not about how much money you make that deems you successful, but how you manage what you are entrusted with.

Matt’s Corner

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The post The Quiet Rise Of Lifestyle Creep appeared first on New Century Investments.

Neuroscience research reveals why emotion plays such a crucial role in our financial decisions. Our brains have numerous neural pathways to prioritize emotional responses, largely due to the influence of the amygdala and the prefrontal cortex. The amygdala processes intense emotions, often triggering rapid, emotion-driven reactions. In contrast, the prefrontal cortex is responsible for reasoning and making decisions from a logical perspective. Understanding this emotional circuitry is key to recognizing how our financial choices are shaped and how we might better manage them. Let’s explore some common emotional biases affecting financial decisions and consider practical strategies for managing them.

Loss Aversion is the psychological phenomenon where the pain of losing is felt more intensely than the pleasure of gaining. This often leads to avoiding investments with potential risks, even if those risks come with opportunities for higher rewards. One way to manage loss aversion is a Cognitive Behavioral Therapy tool called cognitive restructuring. This involves reframing the situation to focus on potential gains, which can help in making more balanced financial decisions. Another effective strategy is diversification. This spreads your investments across various assets, mitigating the risk associated with any single investment.

Overconfidence bias occurs when individuals overestimate their knowledge and ability to predict financial outcomes. This can lead to risky investment decisions based on a misplaced belief in one’s ability to forecast the market. To counteract overconfidence, seek feedback from an advisor or trusted resource who can be a sounding board and offer an objective perspective. Diversifying is also a great way to manage this bias, as it enhances the chances of growth and stability.

Anchoring Bias refers to the tendency to rely too heavily on the first piece of information encountered when making decisions. This could manifest in sticking rigidly to a stock’s purchase price rather than assessing its current value. Make it a point to regularly reevaluate your portfolio. Schedule periodic reviews to assess your investments based on current market conditions, rather than initial benchmarks. Establish clear criteria and goals for your investments rather than relying on past prices or values.

Herd Mentality is the tendency to follow the crowd or make decisions based on what other people are doing rather than your own analysis. This bias can be particularly strong during market downturns when the herd may rush to sell. To manage herd mentality be aware of this bias and view market downturn as potential opportunities rather than moments of panic. Make decisions based on thorough research and analysis, in consultation with professionals in the industry. It is also important to develop a financial plan and commit to it, despite downturns in the stock market.

Emotional Spending is the tendency to make purchases based on feelings rather than need or rationality. People tend to cope with emotional distress through retail therapy leading to overspending and financial strain. Learning to identify the triggers is the first step to coping in a healthy way with the emotions that surface. Once you recognize these triggers you can develop healthier coping strategies that do not involve draining the bank account or impulsively buying. Setting a budget is another great way to manage emotional spending. Budgeting provides a rational roadblock and mental check before the purchase is made. Allocate specific amounts that are allocated for spending, savings, and essentials.

Endowment Effect is the tendency to overvalue something you own compared to something you don’t. This can lead to holding onto underperforming assets due to personal attachment. To manage this bias, seek counsel and assess the value and performance of your assets without letting personal attachment cloud your judgement. Be prepared and willing to let go of investments that no longer serve your financial goals.

We all encounter these biases, and the goal is not to shame ourselves for having them but to acknowledge and manage them for financial wholeness. By understanding and addressing these biases, you can achieve greater financial peace of mind.

Matt’s Corner

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The post How Emotions Are Shaping Your Financial Decisions appeared first on New Century Investments.

It’s a common scenario: we’ll easily spend $30 on a meal, coffee, or entertainment without a second thought, yet when it comes to paying a $30 monthly bill—whether for insurance, subscriptions, or utilities—we often grumble, question its value, or look for ways to cut it out. And the irony doesn’t stop there. We balk at a $30 recurring charge but don’t blink an eye at spending over $1,000 a month on dining out or other discretionary purchases. Why does this happen, and what can we do about it?

The Immediate vs. The Delayed

One of the key reasons behind this spending behavior lies in the concept of immediate gratification versus delayed benefit. When you spend $30 on a nice dinner, you’re rewarded instantly with a delicious meal, good company, and a pleasurable experience. The benefits are tangible, immediate, and often provide a momentary escape from stress.

On the other hand, a $30 insurance bill provides no immediate satisfaction. The benefits are delayed and, in many cases, may never be directly realized. Insurance is a safety net for “what if” scenarios—an investment in peace of mind rather than a tangible good or service. This disconnect between spending and reward makes it feel more painful and less justifiable.

The Perception of Necessity

Another factor is how we categorize expenses in our minds. Daily discretionary spending, like eating out or buying a new gadget, often feels like a personal choice or a reward. These expenditures are framed as “wants,” not “needs,” and we justify them as part of enjoying life.

Conversely, bills like insurance, utility payments, or even monthly subscriptions are seen as obligations or “needs.” They’re often perceived as forced upon us, something we must pay rather than something we choose to pay. This obligatory nature makes us scrutinize these expenses more critically, even if they represent essential services or long-term benefits.

The Impact of Frequency

The frequency of payment plays a significant role as well. A one-time $30 expense feels insignificant compared to a $30 charge that recurs every month. The recurring nature of bills makes them feel more burdensome because they add up over time, and we’re constantly reminded of the financial commitment.

This is why many people struggle with the idea of spending a fixed amount every month on something that doesn’t provide an immediate or visible benefit. It feels like money slipping away, slowly but surely, with no immediate return.

The Anchoring Effect

The way we anchor our expectations also influences our spending behavior. We’re accustomed to the idea that dining out or shopping costs a certain amount, so spending $30 in one go doesn’t seem out of the ordinary. However, when it comes to bills, especially those we think of as fixed costs, anything above a perceived “normal” amount triggers resistance.

For instance, if you’ve been paying $20 a month for a subscription and it suddenly increases to $30, it feels like a significant jump, even though you might spend $30 on a single meal without thinking twice. This anchoring effect causes us to react differently to increases in costs depending on the context.

How to Reframe Your Spending Habits

Understanding these psychological triggers can help you reframe your spending habits and make more balanced financial decisions. Here are a few strategies:

1. Shift Your Perspective: Try to view your monthly bills as investments in your long-term well-being rather than as burdens. Insurance and estate planning, for instance, protects your financial future, which is just as important as enjoying a nice meal today.
2. Bundle Payments: If possible, consider consolidating payments into fewer, larger transactions. This can reduce the frequency of those “pain points” and make the expenses feel less burdensome. For example, business planning could include your accounting, legal, and insurance as one bundled investment.
3. Set Priorities: Evaluate your discretionary spending. Are there areas where you can cut back to free up money for essential expenses? Sometimes, being mindful of where your money goes daily can reveal opportunities for savings that can be better allocated to recurring bills.
4. Automate Where Possible: Automating your bill payments can reduce the mental load and remove the temptation to avoid or delay payments. When bills are automatically paid, they become just another part of your financial routine.
5. Create a Reward System: Balance out the feeling of paying for something intangible by creating a reward system. For example, treat yourself to something small when you pay your bills on time each month. This can help create a positive association with paying necessary expenses.

Conclusion

The way we approach spending—whether it’s on a daily meal or a monthly bill—reflects deeper psychological patterns that shape our financial behavior. By becoming aware of these patterns, we can start to make more conscious choices, prioritize our spending, and ultimately feel more in control of our finances. Remember, every dollar spent is a reflection of your values and priorities, whether it’s for today’s pleasures or tomorrow’s peace of mind.

Matt’s Corner

The post The Psychology Behind Spending Money appeared first on New Century Investments.

In one way or another, we all have a complex relationship with our own money. Because of that, it’s hard to be rational all the time in how we use it. But where do our behavioral biases come from, and what can we do to counteract them? We explore these questions below.

What Are Behavioral Biases?

Many of us set budgets, monitor our investments and spend conservatively. In doing so, many of us like to think that we are acting rationally with our money. But the truth is, people are emotional when it comes to their finances and that can affect their decision-making.

Common emotions that influence how we spend and invest include:

• Fear
• Guilt
• Shame
• Envy
• Hope
• Excitement

In terms of investments, this could lead to decisions that impact your portfolio in the long run. For example, you may choose to “follow the crowd” due to fear of missing out or sell shares impulsively when stocks start trending down.

Emotional spending (sometimes nicknamed “retail therapy”) is another common practice influenced by behavioral biases. When you’re unhappy or upset, buying something new can make you feel better (at least for a little while).

You’re not alone in your behavioral biases, and you can take action to change those things that may be impacting your financial standings.

What Not to Do

Although it may be tempting, avoid making rash investment decisions based on what you see in the news or hear from friends and family.

For example, you may hear that a CEO of a major corporation is stepping down because of a fraud allegation against him. In turn, your first reaction may be to get rid of your stock in that company. When in reality, this may not have any impact on the company’s performance – especially in the long run. Instead of thinking about that company’s stock over the span of years or decades, you made an in-the-moment decision based on short-term changes. Your gut reaction was to protect your assets right now, when in reality you may have actually hurt your chances for greater returns down the line.

What Can You Do Instead?

Talk to a Professional

If you know that planning your future spending and managing investments tends to be dictated by your emotions, consider working with a financial advisor. He or she will be able to act as an educated, unbiased third party to guide you through investment decisions and other aspects of your financial life.

Think Long-Term

It is also vital that you think long-term when making decisions, rather than following trends that will not be beneficial to you in the future.

Know Yourself

Being self-aware is an important step in avoiding behavioral biases when it comes to investing. Know your level of risk tolerance and allow that information to help determine your asset allocation strategy. Doing so should help alleviate some worry regarding your investments and reduce the urge to make choices impulsively.

Acknowledging and controlling your behavioral biases can help you feel confident in your investment decisions and everyday spending choices. Working with a trusted financial advisor allows an objective third-party to offer educated guidance and direction – without emotional bias.

Conclusion

Everyone has a different relationship with money. And because of that, we all have different behavioral biases when it comes to money. But by being aware of these biases, and making an effort to correct for them, we can make better decisions with our money. If you’re not sure where to start, talking to a professional can help get you on the right track. They can offer a second opinion and provide guidance, assurance, and clarity on financial decisions. By being cognizant of our personal money biases, we can strive to reach our maximum financial potential.

Take the Next Step

Now that you know a little more about your relationship with money and some of the behavioral biases that can come into play, it’s time to take the next step. If you’re unsure where to start, talk to one of our experienced CPA or CFP® professionals at New Century Investments. We can offer a second opinion and provide guidance, assurance, and clarity on financial decisions. New Century Investments is here to help you every step of the way. Contact us today to get started!

Matt Ward, CFP®

Please call us or click this link to schedule an appointment

New Century Investments

817-238-6300

Matt.Ward@newcenturyinvestments.com

The post You’re Biased Toward Your Own Money. Here’s What You Can Do About It appeared first on New Century Investments.