The Psychology of Money
Money is a powerful force that plays a big role in our lives, and no matter how much we may plan and strategize, sometimes it can still feel out of our control. Though there may be external elements at play, this is often due to the numerous psychological factors that can influence our somewhat complex relationship with money. By examining these connections, we can begin to have a deeper understanding of our spending and saving habits and adjust them in a more positive direction.
The impact of emotions
While we all know money can’t buy happiness, that doesn’t mean there’s no connection between the two at all. In fact, our emotions are often major driving factors behind our financial decisions. Money itself can evoke a wide range of feelings, including fear, anxiety, guilt, and shame, that can override logic. For example, someone who’s feeling stressed about debt may be more likely to avoid making financial decisions altogether. But even unrelated emotions can shape our actions: we tend to make more impulse purchases when we’re happy and excited, and if we’re sad, we may participate in a little retail therapy, even if it’s not a smart financial choice.
However, that’s not to say that all emotions inherently lead to bad decisions. The way you feel about money can motivate you to work harder in your career, build a larger savings account, or increase your overall financial literacy. The key is understanding which emotions can be triggers for your financial habits—both good and bad. By defining the relationship between the two, you can better recognize your tendencies and develop healthier strategies for coping with them.
The influence of childhood
Most people’s relationship with money is deeply influenced by their upbringing, family dynamics, and early experiences. In our formative years, we often establish initial beliefs about the core purpose of money, which we then carry with us into adulthood. For instance, if you grew up in a household where money was always tight, you may have internalized the idea that it is scarce and difficult to come by, making you feel continuously anxious about your spending.
In 2011, financial psychologist Brad Klontz introduced the concept of “money scripts,” or beliefs and attitudes we develop about money during childhood. They can be broadly categorized into four basic groups:
- Money avoidance: Those with this script typically feel guilt or shame about money and view wealth as inherently evil. They may avoid financial planning and have difficulty saving as a result.
- Money worship: These types of individuals tend to equate money with happiness and success. They may chase wealth obsessively, often to the detriment of other priorities.
- Money status: People with this script may tie their individual value to how much money they have, causing them to be preoccupied with displaying affluence and constantly compare themselves to others.
- Money vigilance: This type of person often tends to be cautious and anxious about their finances. They may be diligent savers but also experience chronic stress related to money.
Although you may identify closely with one of these scripts, that doesn’t mean you’re stuck with it. If you can see which one you tend toward the most, you may become better aware of its influence on your financial habits and, thus, more able to adopt healthier ones.
The role of cognitive biases
Like in many other areas of our lives, our financial choices are often impacted by our inclination to simplify information and filter it through our own experiences and preferences. These are our cognitive biases, and they can cause us to make decisions that may not be the best for us in the long run. Consider the anchoring bias, for instance, which occurs when a person relies too heavily on a single piece of information to make a decision. This can potentially lead to suboptimal choices regarding investments, salary negotiations, and much more.
As another example, confirmation bias can lead you to intentionally look only for information that aligns with your current beliefs. This bias can easily obstruct financial growth; since you aren’t looking at a variety of sources, you may be overlooking alternative investment strategies or financial plans that can lead to greater success. Overcoming these biases starts with acknowledging their existence and then working to make more rational and informed choices.
When you understand the psychological factors impacting your relationship with money, you can create healthier habits that may improve your overall financial well-being. To help you on this journey, download the Positive Money Habits Tracker linked below. For additional support, consult with a financial advisor who can help you with your specific situation.
