Though money management is a very common and normal part of every individual’s life, some people find it difficult to manage. In such cases, financial psychology comes to rescue.
What is Financial Psychology?
It focuses on the study of those areas of life which deals with money or finance an individual in relation to their behavioral pattern and emotions. Some people can be good at managing their finances while another may struggle to do so irrespective of their level of income. Many factors of life, such as worldview, lifestyle, and even childhood habits, influence our efficiency in managing finances. One should consider these psychological factors if they are struggling with their finances because these different factors eventually adds up to financial stability in one’s life.
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As we all know life happens at different points of time. The flow of the market takes unexpected turns, we lose properties due to natural calamities, rise of some family emergencies etc. are few unexpected events that might occur at any point in life. Now, people’s reactions to these situation or influences, whether they decide to spend the money or save it, and what reasons they give for their particular decision determines their relationship or understanding of money.
Childhood Experiences and Financial Well-being
Some studies published by The Library of Medicines have shown a relationship between the bad childhood experiences and financial well-being in adulthood. It has been proven that our childhood experiences also influence our beliefs and habits about money, which is influenced by financial habits and the attitude towards money which has been taught by our parents (Teigen, 2022).
This study was expanded and the concept of money scripts was developed by some researchers. These are those unconscious beliefs about money that were made during one’s childhood and now effects their financial habits and viewpoints.
These money scripts are categorized in four categories:
- Money Avoidance: This refers to habits like overspending and not saving money, which will ultimately create difficulty in setting long term goals for an individual.
- Money Worship: this means when, for someone money is everything. Such people think that money rules everything. More money means more power to them. Such people worship money.
- Money Status: according to the believers of this category, their self-worth is based on their monetary worth or net worth.
- Money Vigilance: this is the best out of all the money scripts. In this person keep a track of their savings and spending and if they can afford whatever they buy. However, these people also tend to remain unsatisfied of their earnings.
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Emotional Influence and Financial Decisions
Emotions play a very important role in the financial decisions of an individual. Emotions such as confidence, fear, excitement, joy etc. Contributes a lot to one’s money related matters. Our behavior is also the result of how we think and feel and therefore, following are some tips to take into consideration while making any financial decision:
- Managing Emotions: by managing our emotions well, we can avoid making bad decision under the influence of the emotion that we are feeling at a particular moment.
- Not Being Overconfident: overconfidence can lead us to make wrong decisions resulting in financial loss. It is important to control the level of confidence of thinking rationally.
- Focusing on Upcoming Opportunities: sometimes one may end up losing over something or getting hit by a loss, it is important to not give up and start planning for what is ahead.
- Avoiding Same Actions with Expectation of Different Results: if something is not working even after few trials, it is a waste of time to try it again in the expectation of a better result. Instead, it is better to seek advice from experts and re plan the course of action.
- Gaining Acceptance: it is an everyday job to make decisions related to finances and therefore, it is very normal to get in flow with our emotions and sometimes even end up making wrong decisions because of that. It is important to accept those losses and let them go, to learn from our past and make informed decisions in future. It is also very wise to ask for expert advice while struggling to manage finances on your own.
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Strategies to Make Better Financial Decisions
Researchers have conducted various studies to identify a few strategies that can help individuals keep track of their money and save and spend in accordance with their financial convenience:
- Track Your Spending: According to researches, tracking your expenses and spending is very helpful to make informed financial decisions because it gives you the idea of your saving-spending ratio.
- Making One Decision at a Time: making multiple decisions at one time can leave you mentally exhausted which can eventually effect your decision making capability. It is better to solve one problem at a time and make decision at a time.
- Avoiding Temptations: it is very normal to have an urge to spend and fulfill your desires when you have money in your hand. Try resisting that urge and staying away from places like shopping centers and even online stores. It is important to avoid impulsive shopping habits to achieve long term financial goals.
- Making Valuable Investments: instead of just buying liabilities, try to make valuable investments that can build you passive money in future. Investments such as gold, properties, stocks etc. Are those assets that will definitely bring you value in the future.
References+
- https://www.cyberdb.co/the-psychology-of-money-understanding-your-financial-behavior/
- https://www.forbes.com/sites/johnhyatt/2024/01/17/how-vivek-ramaswamy-got-richer-while-pumping-millions-into-failed-presidential-campaign/?sh=6a2aad795e78
- https://www.mapfre.com/en/insights/economy/financial-psychology-emotions-financial-decisions/
- https://www.apa.org/topics/personality/willpower-finances
