How Our Money Psychology Hurts Us Financially

Each of us have a different approach towards money. We hold certain beliefs about earning it, spending it and also investing it. It is these beliefs that largely influence our choices and ultimately determines our financial health.

Beliefs

Following are some of the common beliefs that people hold regarding money:

Money Avoidance

Some of us have a strange belief that money is a bad thing. That it inculcates greed in us and therefore they will be better off without earning much money in life. For them running behind money is not the trait of the enlightened. These individuals may also involuntarily think that money is a source of stress and that one shouldn’t care too much about how much wealth they accumulate in their lifetime.

Money Worship

If those who detest money belong to one extreme, the ones who worship it probably belong to the other. For them money is everything. It gives them fulfilment and also happiness. It is their belief that no matter how much they earn it is less and that it is practically impossible to be poor but still be happy.

Money Status

This category of humans lies somewhere between the two extremes that we have described above. For them there is practically very little difference between the two most well known types of worth – net worth and self worth. They believe that neither of them can be determined without knowing the other. They also tend to believe that their success can only be measured by how much they earn or the things that they own reflects their true worth.

Money Vigilance

You may have come across people who treat their money like it’s their baby and that they are every bit justified in being paranoid about where it gets spent. They tend to keep a careful watch on their finances and generally believe things like ‘you can never get the right deal in the first go’. They are always saving their money for a rainy day which strangely never comes. These are the people who are idolised by the grown ups of our society. While such an attitude towards money can be helpful it can also lead to an extreme fear of losing money which compels them to stay away from investments.

How to Identify Which Belief You Follow

If you read any of the above descriptions and said to yourself ‘isn’t that how everybody perceives money to be?’, then you definitely belong to that category. It is only when you understand which type you belong to can you really begin to understand how it could be affecting your money decisions.

How it Affects Spending

It is our perception of money that makes us spend money the way that we do. And it is our financial psychology from which this perception stems.

If you’re one of those who avoids money, you wouldn’t think much about it and possibly not think twice before spending it. Those that harbor such a psychology relating to money find it easier to buy things without giving it much thought. They may deal with maxed out credit cards and overdrafts later, but who cares right? They have difficulty grasping the importance of budget or keeping track of expenses.

Those who worship money and determine their own status by it, are also inclined towards spending but they like to keep track of how much they spend (there are certainly exceptions). However, these spenders experience greater pride in owning money than being debt free or having a positive bank balance.

The money vigilant on the other hand are prone to spending very little money. Having such a money psychology can cause emotional distress and make them spend more in the long run. For example, these individuals may retain an old pair of shoes for years but cause themselves an injury which costs them thousands later.

How it Affects Savings

Most of us are sensitive when it comes to the topic of savings. And many of us are guilty of not saving enough. But in many ways our commitment towards saving money is strongly connected to our financial psychology.

Those with a money avoidance tendency may find it difficult to save much money as they are not particularly fond of the concept of money. They are also the ones who are never interested in learning how to make a Will because they may not even have assets to give away!

Money worshippers on the other hand associate themselves strongly with money and as a consequence end up saving more than the former category. But when it comes to savings it is the money vigilant which clearly take the trophy away.

While how we think about money does play an important role in determining how successful we are with it, there are many other factors at play which can hardly ever be known or understood.