Financial confidence can help you make prudent money decisions

Melinda Perez, a financial educator, still remembers the first time she felt financially confident.

She had recently started investing money outside of her employer-sponsored retirement account because she was finally earning more than she spent.

“It was exciting because, for once, I had what felt like extra money,” says Ms Perez, who lives in San Antonio, Texas.

Financial confidence, or the belief in one’s money-related abilities, might not come up as much as financial literacy but money experts say it is often the hidden ingredient behind savvy money decisions.

“If there’s no financial confidence, there is no willpower to succeed. We translate that to financial self-efficacy,” says Ms Perez, who also studies financial confidence as part of her doctoral research in organisational leadership.

But confidence with money can be hard to come by. According to a NerdWallet survey in January, three quarters of Americans say they do not feel confident about their personal finances for the current year, and many of them cite the uncertain US economy.

There are ways to boost your financial confidence and here is how you can get started:

Seek financial education

Learning essential lessons around budgeting, saving and investing helps to boost financial literacy, Ms Perez says, which can positively affect actions.

“To increase financial confidence, we need to increase education, so you know what tools you need,” she says.

Those seeking financial education should start with local organisations and community groups that provide information free of charge, she says.

Finding financial literacy-focused groups on Facebook or searching “financial education resources” for your area can lead to helpful resources.

“Find your community that talks about finances in a non-judgmental way”, so you have a safe place to ask questions, Ms Perez says. That community might include friends and social media groups.

Your financial institution can also help, says Jennifer White, senior director of banking and payments intelligence at JD Power, a consumer research company.

Banks and credit unions often provide online tools to help customers visualise their cash flow and see how they can improve their savings and credit.

That kind of support is good for consumer confidence and business at the bank. “Once customers feel supported, they are more likely to be loyal when they open up their next account,” Ms White says.

Watch out for overconfidence

Confidence plays a big role in day-to-day money and debt management, says Lucy Delgadillo, professor of family finances at Utah State University’s College of Agriculture and Applied Sciences. But creating positive outcomes depends on having the right amount of it.

“When you have overconfidence and low knowledge, that’s the worst situation. You’re more likely to get into high-risk behaviours such as overextending credit and overly risky investing,” says Ms Delgadillo.

She encourages people to reflect on their own levels of confidence and knowledge and to tread carefully when there is a mismatch.

“It can motivate you to investigate and get the information you don’t have available at that moment. For example, to find out the difference between a stock and a bond and to fill in the gaps in knowledge you might have,” Ms Delgadillo says.

She recommends checking information gleaned from social media with other sources before acting on it, especially on trendy topics such as cryptocurrency.

Many Americans struggle with basic financial literacy around core topics such as compounding interest and investing risk, Ms White says.

“There’s a gap between what people think they know and what they actually know.”

Learn and improve

Like Ms Perez opening her first investment accounts, heightened confidence can help lead to smarter money decisions.

“It’s like an athlete practising and knowing everything about a sport. Once you have that knowledge, you become a better participant,” says Clark Kendall, chief executive of Kendall Capital.

That working knowledge is especially important today.

When Mr Kendall asked his daughter, who is finishing her master’s in business administration, if her degree was worthwhile, she responded that it was – mostly because it gave her confidence. “Education, in general, gives people confidence to follow their dreams and aspirations,” he says.

Making smart money decisions can be difficult for some but support from like-minded community groups can help