Want to be 'good with money'? The key is to think small

Money and emotion should never mix, writes Frances Cook, but money and psychology can be a powerful mix. Whether it's saving or investing, think small and you're already leaps and bounds ahead of the version of you who prefers not to think about your finances at all. By Frances Cook

When you’re trying to make a change, the trick in almost all areas of life is to start small. But it’s particularly true with money.

Money can trap us with black and white thinking. You’re good with it, or you’re not. You’re a saver, or a spender. You’re successful, or you’re not. Of course, life is made in the grey. Few of us are truly only one of those things. But it can be easy to fall into the trap of thinking that way.

Money can also be intimidating. Most of us weren’t taught about it at school, and making any change at all can feel overwhelming.

Know what fixes both of those problems? Starting small.

Starting small lets you build up good habits, that will then grow to become bigger over time. Adding $20 a week to a savings account might feel pointless, but you’ll build up $1000 in less than a year. That’s a good emergency fund – say something unexpected happens that costs you a few hundred dollars, you can dip into your savings rather than your overdraft or credit card, and avoid getting into a hole (with interest) that you then need to dig yourself out of.

It’s also easier to ratchet savings up from $20 to $30 a week, then $50, then maybe more, than to jump right in and start saving $100 per week.

It’s like hitting the gym, when it’s been a while. You start with some smaller hand weights, and work your way up to a new personal best bench press.

Starting small means you don’t pull a hammy, and give up entirely.

Starting small is also the perfect way to begin something a bit scarier, like investing into the sharemarket – a brilliant way to build your wealth and financial security, but many people find the prospect of it foreign and overwhelming and so they never even dip in a toe.

All it takes is that one uncle over family brunch telling you that it’s all a casino, and you become afraid to put your hard-earned $2000 to work. Who would want to risk it?

But micro-investing platforms make it easier than ever to get started, with ten, five or even one dollar at a time.

Just like saving, this means you build up the habit of putting money away for future you.

More importantly, though, this time you also get to learn by doing. You can put a few dollars into funds or companies that you like, and watch how they perform. You’ll see dividends trickle in, and companies go up and down in value. You’ll realise it’s nowhere near as complicated as you feared.

When the market inevitably hits a rough patch, and values go down, it’s easier to hold your nerve if you only have $200 in there, than if you have $5000.

With less on the line, you get the opportunity to learn that investing is a long-term game, and normal market dips are something to wait out.

Money and emotion should never mix, and if you start small, it’s easier to avoid any panic if you feel like you’re not getting it right immediately.

When you start making these changes, you’ll automatically begin to pay more attention to your money.

It’s the beginning of a more positive cycle – reducing stress and feeling more in control, as you build up savings and prove to yourself that you can stick with better financial behaviour.

As you feel more positive about your money, you’ll avoid it less. This might mean more checking in with your bank account, to monitor your spending. It could mean paying bills faster, because you’re not avoiding them.

As you pay more attention, and get the positive reinforcement of the small money changes you’re making, bit by bit, you’ll have a more specific understanding of your money position. And you need to have a good understanding of where you are now, before you can figure out how to reach the bigger goals. Starting small is the key.

Information in this column is general in nature and should not be taken as individual financial advice.