Imagine this: it’s the day after Halloween, and you are about to enter your local big-box store retailer. EVERYTHING about the store flashes “SALE!” Who or what is in control of your actions in this situation? Let’s consider two different mindsets and possible outcomes related to how we might approach our shopping trip in this scenario:
Mindset 1: I can positively affect the wealth my household accumulates.
Potential Outcome: I will shop and spend in a way that will help my household accumulate wealth. I will use the list I created in advance to shop, and I will ignore the sales, the end-cap flash, and the ubiquitous $1 items because my interaction with them will affect the achievement of my goals.
Mindset 2: Things outside of my control impact if and how my household accumulates wealth.
Potential Outcome: I shop for items I may or may not need. It doesn’t matter. My spending behaviors won’t impact my financial success or wealth accumulation. I don’t need a budget because something else ultimately impacts my financial success.
You can apply either of these two worldviews or approaches to a whole host of financial situations: from what we do on a day the stock market loses 5% of its value or to when someone asks us to donate to a cause that’s outside the amount we’ve budgeted for.
Locus of Control
Having an appreciation for where we stand on locus of control (LOC), the personality characteristic that differentiates those who believe they can control everything from those who believe things happen to them, can help us understand why we often think that some things, like financial situations or circumstances, are within our control or not. In a very general sense, those of us with an external locus of control tend to believe that external forces (e.g., government, other family members, our jobs or bosses, our neighbors) influence and determine our success and failure. Luck also plays a big part in perceptions of failure and success for those with high external LOC. Taking action will have little effect, so those with external LOC believe.
Alternatively, those with internal locus of control believe that they can control their own success and failure (and in some extreme cases, maybe everything and everyone else). In other words, they believe their actions impact outcomes, more so than the circumstances or other external forces. “There’s no such thing as luck,” as Obi-Wan Kanobi says in Star Wars, could be the motto of those with high internal LOC.
Those who are financially independent focus on their own choices, taking responsibility for their money-related actions and behaviors.
– The Next Millionaire Next Door, page 58
Our research indicates that, generally speaking, financial success is positively correlated to higher internal LOC. In other words, those who believe that their own actions can impact outcomes tend to have a higher net worth, regardless of their age and income, than those who have a higher external locus of control. The reason for this is simple: when it comes to money management, behaviors matter.
We can see how these mindsets (or personality characteristics) could impact us on a daily basis, especially in the role of the household CFO. With high internal LOC, or what we at DataPoints call responsibility, it is likely that you’ll be much more effective at your job if you accept that the actions you take (or don’t take) will impact your financial outcomes. In other words, those with higher internal LOC assume that their own actions related to money will have a successful and demonstrable impact on their households’ finances.
Life Experiences: The Impact on Children & Money Management
Understanding locus of control can also help us when we consider how we talk to or teach children about financial management. Having children own certain aspects of their personal financial situation from an early age is critical: demonstrating to them that if they engage in certain behaviors (e.g., earning money, saving money, , and investing) they will affect how much money they have in the future and what they can purchase. Seeing is believing in this case. If they are consistently bailed out, gifted, and fulfilled financially from an early age, why would they ever think they are in control of their finances? They aren’t! You’ve been the external factor that is fulfilling their every wish and desire.
Looking Backward to Move Forward
What about adults? What if your prior life experiences have led you to believe that someone or something else was at work in your life, determining your financial outcomes? That other factors outside of your control impact you daily? Perhaps you witnessed how your parents were treated because of some factor like the color of their skin or their religion. Seeing this at an early age could potentially impair your ability to see how any behavior you engage in could change certain results. Here again, like with so many experiences we have as adolescents, a sober and mature assessment of our current circumstances, and what we can actually control today is required. Identifying beliefs or biases that we learned early on is the first step. The second step is to determine if those beliefs or biases are true or accurate.
This second step requires knowledge, and maybe even a little bit of wisdom. To combat the idea that you cannot impact your financial outcomes, educate yourself regarding what it takes to reach success–financial success–however you define it. Study and read objective research (not feel-good stories) from reputable sources. Go to the academic research if you are so inclined (we know we are). Find people who have sound judgment that are known for providing objective, fiduciary advice. Maybe even do some digging to find someone who is stealth wealthy–you know, someone who could be a millionaire-next-door type. (Hint: look at the books on their bookshelves or favorites lists.) These types of people often have the characteristics, or can help you develop the characteristics, that are conducive to building wealth. Begin a process of identifying cause and effect in your own financial life, and understand that a change in mindset may take some time to adopt. After a lifetime of believing that your own behaviors have little to do with your circumstances and outcomes will take some time to overcome. Take small steps and look for incremental gains.
In reality most of us are somewhere in the middle of the external-internal locus of control spectrum, and many of us recognize that success in life is often a combination of hard work and a little luck. Even if we hold certain beliefs about who or what impacts our financial success, the critical piece is how we take action based on those beliefs. In any event, the data is clear: adopting a “what I do matters” approach to financial management may allow you to be your own source of money-related success over the long-term.