Financial Self-Awareness: The Must-have Skill For Better Money Management

By now, most of us already know the importance of living and spending within our means. But how many of us have a complete grasp of our basic financial situation? 

If I came to you today and asked, ‘what is your net worth?’ Would you give me an instant answer? Or would you need to take a minute to do a mental calculation and then give me a rough estimate? 

So if you consider yourself financially informed but take a minute to calculate your net worth, then you are failing yourself somewhere. 

Studies show that people with a high level of knowledge of their personal finances reach their financial goals a lot faster than those who do not. It helps guide your spending, saving, and even investing. This article breaks down what financial self-awareness is and how the reader can achieve it. 

What Is Financial Self-Awareness?

A study published by the Financial Planning Review in 2019 coined a new term ‘the financial self-awareness’ and defined it as:

“…detailed knowledge about one's current financial assets, liabilities, spending patterns, and financial outcomes.”

The study went ahead to explain that the higher the level of financial self-awareness, the more positive financial decisions and satisfaction among individuals. Therefore, the more aware you are about your personal financial situation, the more positive outcomes you will get in areas of:

• Financial satisfaction
• Spending
• Saving and investing
  

This is because a better understanding of your financial situation directly translates into efficiency in handling your personal finances - you become more financially responsible. 

The study noted that people with a higher level of financial self-awareness tend to save more and have better control of what they spend. 

From the sample taken, the study found that most people - even people with sound financial knowledge rarely pay attention to their spending habits, let alone prioritising saving and investing.  It attributed this to a lack of sufficient financial self-awareness. 

Are You Financially Self-Aware?

So how financially aware are you? Have you ever had your card declined while trying to pay for groceries in a supermarket because you were unsure how much the card still holds? Or have you had debt collectors raid your home or business because you defaulted on a loan?

Being financially self-aware is not a superpower. Instead, it is the ability to stay on top of every financial aspect of your life. You do not leave anything to chance. 

It is the ability to know every asset under your name - including the value of that ancestral piece of land in Makueni that was allocated to you by your grandmother - to every liability in your life. 

This knowledge also includes a thorough understanding of your spending, saving, and investing behaviors. 

The increased awareness of your personal finances improves your financial wellness in many ways. 

• It increases your confidence in handling your money. 
• It enables you to make wiser and more informed spending and saving decisions. For example, with a detailed knowledge of how much you earn and how much you spend, you can make better predictions of these activities and then better plan for future savings and investments.
• A good grasp of your financial situation gives you power over your debt accumulation. It gives you control over your debts through better money management and regulated spending. 
• Combined with sound financial literacy, financial self-awareness creates useful long-term money behaviors such as saving for retirement and investing for the future. 

How to Increase Your Financial Self-Awareness

The core of financial self-awareness is understanding your financial situation and your spending and saving habits. But this is easier in theory than in real life. So how do you increase your financial self-awareness in real life? Here are some tips:

1. Don’t live in the moment

There is nothing wrong with living in the moment. In fact, psychologists and self-helpers all advise us to live in the moment in order to get the best out of life.

However, if living in the moment makes you blow your last 20K on a bottle of French wine, then there is a problem. You will get great satisfaction enjoying the exquisite taste of that bottle of wine, but that will be short-lived.  After the ‘high’ is gone, the reality of trying to survive the rest of the month with no money will then hit you hard.

But this does affect all of us - even those with more than 20k in their bank accounts. It is therefore important to be more aware when making certain financial decisions that affect our spending behaviors. 

2. Learn how to avoid FOMO

FOMO is short for “Fear Of Missing Out.” It is defined as the overwhelming anxiety you get at the thought of not experiencing the exciting prospect that might be happening elsewhere. 

This anxiety makes you feel like you also have to have this experience. It floods your mind and affects your reasoning. Before you know it, you are spending money that you did not budget for - or even reaching into your emergency savings. 

So, another important aspect of being financially self-aware is the ability to stay in control of your spending even in this peer-influence-filled world. The ability to say no to an urge to impulse buy just to fit into the crowd. 

3. Obsess over your budget.

How can you say you are financially self-aware without the knowledge and the ability to draw and follow strict budgets? 

Not only that. You need to obsess over your budgets. Make a schedule to draw budgets and then review them often. In fact, review your budget and your bank accounts every day. Review it repeatedly, in your head and on paper, and obsess over executing it.

Also, do budget reconciliations often to ensure that you are keeping on track. In summary, take your budget very seriously. This is the only way you will retain control over your spending. 

4. Track your spending

This goes hand in hand with obsessing over your budget. Tracking your expenses is one of the critical factors in making your budget work for you. You need to know and record every expenditure so that you can be able to do a budget reconciliation. 

There are several available options to help you efficiently track your expenses. There are even very easy and customizable mobile applications on your mobile phone that you can use and log in entries every time you purchase something.  You can also use a computer spreadsheet or a handwritten ledger. 

Just choose what works for you and enjoy keeping track of every shilling that goes out of your pocket. 

5. Match Spending With Saving

This is a trick I learned very late in my financial journey. If you absolutely have to spend money on an unnecessary purchase, match it with savings. 

For example, if I see a handbag that I absolutely love online before I click the purchase button, I have to check my bank account and transfer the same amount as the price of the handbag into my savings account. 

This makes saving a higher priority than the said handbag. This practice often knocks sense into your brain and restrains you from spending on things you don’t need. 

WRAPPING UP

It is not enough to merely be knowledgeable about money. To survive, you need more. A lot more. You need to be on top of your game when it comes to your finances. Not only about how much you earn and how much you spend. 

From the top of your mind, you need to know where every shilling of your money is at this very moment. With this, you will be better at money management and put you in the direction to achieve your long-term financial goals faster.