How to set financial goals you’ll actually follow

The start of a new year is a natural time for reflection and resetting our goals, especially when it comes to our finances. We resolve to save more, spend less, invest wisely, and finally get a handle on our money. 

But as the weeks pass, many of us find ourselves slipping back into old patterns, our shiny new financial goals fading in the rearview mirror.

Why is it so challenging to create lasting change in our financial lives, even when we intellectually know what we should be doing? The answer lies in our brains — in the complex tangle of thoughts, emotions, and unconscious scripts that drive our financial behaviors.

The emerging field of neurofinance, which combines neuroscience, psychology, and economics, offers fascinating insights into how our minds really work when it comes to money. 

The power of mental accounting

One key concept from the world of neuroeconomics is "mental accounting" — the idea that we tend to treat money differently depending on where it comes from and what we intend to use it for. 

Mental accounting explains why we're more likely to splurge with a windfall or tax refund than our regular paycheck, or why we'll drive across town to save $10 on groceries but hardly blink at a $10 fee tacked onto a $100 purchase.

Our brains instinctively categorize and assign meaning to different pools of money, which can lead us astray from optimal financial choices. One famous study asked subjects to imagine they had tickets to a football game, which they had either paid for or received for free. They were then asked if they would still attend if there was a blizzard on game day. 

The result? Those who paid for their tickets were much more likely to brave the elements, demonstrating the "sunk cost fallacy".

So how can we turn mental accounting to our advantage? One effective tactic is to intentionally label different accounts for specific goals, like "Hanna’s College Fund" or "Dream Vacation Account". 

This aligns our natural tendency to categorize money with our actual priorities. When our checking account is just one big pool of cash, it's all too easy to overspend. But when we have to raid our Dream Vacation fund for an impulse buy, it forces us to reckon with our real goals.

Another way to make mental accounting work for you is to automate your savings and investments, effectively hiding money from your brain's short-term calculations. If you never "see" that money in your primary checking account, you'll be less tempted to consume it. The retirement industry has successfully used this principle for years with automatic 401(k) contributions from payroll.

Overcoming loss aversion

Another major insight from neurofinance is that humans are profoundly loss averse. Research shows that the pain of losing is psychologically about twice as powerful as the pleasure of gaining. In other words, we hate losses much more than we enjoy gains.

This plays out in our investing lives as the tendency to panic sell during market downturns, turning temporary paper losses into real, irrecoverable ones. Our emotional brains irrationally react to any loss, overriding the logical part of our minds that knows markets move in cycles.

So how can we train our brains to be less loss averse? One key is to simply limit how often you look at your investment accounts. The more frequently you check your balances, the more your brain perceives losses, even if they're just normal market fluctuations. Adopt a long-term perspective and resist the urge to constantly monitor the ups and downs.

Another tactic is to reframe how you view market volatility. Instead of dreading downturns, think of them as "sales" on stocks — opportunities to buy your favorite companies at a discount. 

Regularly investing a fixed amount, an approach known as dollar-cost averaging, ensures that you're buying more shares when prices are low. Over time, this can lead to better returns as you accumulate more shares for your money.

It also helps to have a written investment plan that lays out your strategy ahead of time, including how you'll respond to market crashes. Committing your rules to paper when you're calm and rational helps prevent your emotions from hijacking your decisions later. With a plan in place, you can train yourself to view losses as signals to buy rather than sell.

Hacking your brain chemistry

Beyond these behavioral tricks, neuroscience also offers clues into how we can adjust our brain chemistry to promote better financial decisions.

One promising area of research involves the "cuddle hormone" oxytocin, which our brains release when we bond socially. Neuroeconomics studies have found that a dose of oxytocin makes people more trusting, generous, and attuned to others. In one experiment, subjects who inhaled oxytocin offered 80% more money in an investment game compared to those given a placebo.

While I'm not suggesting that you start snorting oxytocin before rebalancing your portfolio, we can naturally boost this feel-good brain chemical through positive social interactions. Something as simple as meeting a financial advisor or trading tips with a friend over coffee could elevate your mood and prime your mind for smart money moves. Schedule your financial check-ins after social activities, not during stressful or solitary times.

Sleep is another essential ingredient for a healthy financial mind. When we're underslept, our brains struggle to integrate memories and regulate our emotions. One study scanned the brains of people as they choose between immediate rewards or waiting for a larger future payoff. Those who had pulled an all-nighter had half the activity in their prefrontal cortex, the rational region of the brain, compared to the well-rested participants.

Skimping on sleep effectively robs the logical part of your mind of the energy it needs to rein in your impulsive desires. Before making any significant money choice, like buying a car or applying for a mortgage, ensure you've had at least 7-8 hours of shut-eye. Your well-rested mind will be better primed to think through the trade-offs.

Cultivating mindfulness

Perhaps the most potent financial tool our brains have to offer is the skill of self-awareness. Mindfulness, the ability to nonjudgmentally observe our own thoughts, feelings, and behaviors in the moment, is linked to a host of positive outcomes, from lower stress to higher self-control.

One study found that a brief mindfulness training was able to reduce the emotional impact of financial losses in a stock investing game. By learning to take an objective, bird's eye view of their own mental states, subjects were less consumed by the pain of losing money.

You can cultivate financial mindfulness through a regular meditation practice, even if it's just five minutes a day. The key is consistently training your mind to step back and recognize, rather than react to, your own impulses and emotions. This allows you to insert a moment of conscious choice before acting on the urges to splurge, panic sell, or otherwise sabotage our own best laid plans.

Another mindfulness tool is to keep a financial journal, recording not only your income and expenditures but also your accompanying emotions and thought patterns. Jot down how you feel and what's running through your head when you get your paycheck, browse your favorite online store, or see an alarming headline. Getting your mental chatter down on paper is often the first step to disempowering it.

Rewriting your money scripts

Perhaps the most challenging, but also most transformative, part of rewiring your financial mind is identifying and updating your deep-seated money scripts. We all carry subconscious beliefs about finances shaped by our families, communities, and personal histories. Some of these invisible rules may serve us, but others can keep us financially stuck.

Maybe you absorbed the message that money is taboo and shouldn't be discussed, leading to shame around financial issues. Perhaps you grew up believing that wealth is only for the ruthless, sparking an unconscious aversion to earning more. Or your parents' volatility around money may have bred an anxious scarcity mentality, even if your adult circumstances are stable.

While these old stories can feel set in stone, modern neuroscience has shown the lifelong capacity of our brains to grow, change, and create new pathways. The first step is simply to start noticing when these old scripts are playing out — those moments when your financial fears or beliefs seem outsized to the situation at hand.

When you catch yourself thinking "I'm just bad with money" or "Investing is only for experts," pause and question it. Is that really true? Or is it just an story you've been telling yourself? What alternative perspectives or small actions could begin to write a new chapter?

This isn't about berating yourself for past choices, but rather consciously deciding that you want to craft a new financial future, one thought and one choice at a time. 

With self-compassion and patience, you can slowly overwrite outdated money scripts with more empowering ones — beliefs in your own capability to learn, your inherent worthiness of abundance, and your agency in authoring your financial life.

As you embark on this financial rewiring, remember to start small and build slowly. Our brains crave the dopamine hits of quick wins, so set yourself up with easy financial goals you can achieve early on to generate motivation and momentum.