The Connection between Psychology and Money

Sources: Manage your money like a f*cking grownup by Sam Beckbessinger.

Psychologies magazine January 2024

Introduction

“Being in control of your money means being in control of your life.”

Money is a topic that touches everyone’s lives, yet few truly understand the psychological underpinnings that influence our financial decisions. In this blog post, we will explore the relationship between psychology and money, and common psychological biases in financial decision-making.

Emotions and Money

“Stop thinking that you need to be less emotional about money.”

Every purchase you’ve ever made in your life can be seen as your own personal diary of life. This means that money is a very important aspect of your life and should feel emotional. Being more in control of your finances means that you’re spending it on things that really matter to you and have actual value. So, in order to do this, you must decide what is important to you by realising that you can do anything but not everything with your money. In other words; to have money is to have freedom. Another important thing is EQ (Emotional intelligence) which plays a crucial role in how we manage our money. People with high EQ are better equipped to make sound financial decisions, communicate effectively about money matters, and navigate financial challenges with resilience.

Choices and money

“You gain control by being more conscious of your choices”

We are surrounded by the world’s idea of what is considered a good life and what you need to be fulfilled. Therefore, most people are constantly bombarded by media and companies trying to take control of your money choices and tell you what should be important to you, such as “In order to be loved you must buy this brand-new lipstick shade”. You don’t have to allow this! You have more choices than you realise. Make those choices deliberately, focus and dream bigger. You must decide what matters to you. Don’t spend based on others’ idea of what makes a good life. Another thing to consider is stress which also has a significant impact on our financial behaviour. When under stress, individuals are more likely to make impulsive purchases, engage in emotional spending, and have difficulty sticking to a budget.

The Psychology Behind Looking Rich

“Trying to look rich is how most of us get poor.”

Be careful when seeing someone driving around in a very expensive car. How did they manage to pay for it? Most people who look ‘rich’ are actually not, they are simply trapped by debt. What really makes someone rich, is saving every cent they can and buying assets. To be wealthy is to spend less time working for money, be debt-free and make choices without limitations.

Happiness and money

“Money doesn’t buy (much) happiness.”

Money definitely does make you happier but it looks like this: giving an extra R1000 a month to someone who’s poor, will make a huge difference in their life but give that same amount to someone who’s rich and it will make no difference to them. This is called the Hedonic Treadmill. This simply means that when you already have nice things, it won’t make you happier when adding to that. Another thing to consider is Purpose. We tend to feel happier when we are able to give to others. This makes us feel more satisfied and fulfilled.

Your brain on money

“Dumb biases we all have”

Just to mention a few…

But I want it NOW (temporal discounting)

E.g. put a marshmallow (R100) in front of a child or adult, and tell them that, if they can resist eating the marshmallow for ten minutes, they can have two marshmallows. No what will happen? Unfortunately, we are programmed to put more value on that one marshmallow now and eat it than rather wait.

Irrational fears (risk estimation)

We as humans are not very good at understanding how dangerous certain things are and aren’t in our life. E.g. humans are far more worried about getting on an aeroplane than into a car, even though being in a car crash is far more likely than dying in a plane.

Lucky streaks (gambler’s fallacy)

E.g. when we’re on a winning streak, we tell ourselves we’re on a roll and when we’ve been on a losing streak, we tell ourselves we’re owed a win. This leads to really bad investment decisions. Unfortunately, life doesn’t play fair.

“It’s time to stop measuring your value by your bank balance and include financial well-being in your self-care” – Ellie Austin-Williams

Conclusion

In conclusion, the psychology of money is a complex and fascinating subject that influences every aspect of our financial lives. By understanding the psychological factors that impact our money decisions, we can cultivate healthier financial habits, make better financial choices, and achieve financial well-being. Remember, the key to financial success lies in mastering the psychology of money.