Money isn’t just about numbers – it’s deeply personal, emotional, and psychological.
It’s also individually unique; our financial habits and decisions are shaped by our beliefs, experiences, and emotions, which often dictate how we save, spend, invest, or manage debt.
If you’ve ever wondered why you struggle to save, why some purchases make you feel euphoric while others leave you with buyer’s remorse, or why certain financial decisions are so hard to make, it all comes down to the psychology of money.
By understanding the underlying psychological factors that influence our financial behaviours, we can take control of our finances, make better decisions, and build a healthier relationship with money.
This article will explore the key aspects of money psychology, from how we assign value to our spending, to the emotional triggers that drive our habits. We’ll also discuss strategies to develop healthier financial habits and make rational choices that support long-term financial wellbeing.
Understanding Value: How We Assign Worth to Money and Purchases
When we talk about money, we often assume it has an objective value, but the truth is that the way we perceive and assign value to money is highly subjective. The value we place on a product, service, or experience is shaped by factors like our upbringing, cultural background, and personal preferences.
The Concept of Subjective Value
Each of us has a different idea of what constitutes “value” based on our personal experiences.
For example, one person may feel that a designer handbag is worth the hefty price tag due to the status or satisfaction it brings, while another might consider that same handbag a frivolous waste of money.
This is because our perception of value is influenced by factors such as:
Personal Priorities: What we value is often linked to what we prioritise in life. Someone who values convenience and time-saving might willingly pay extra for fast delivery services or premium subscriptions, while someone else may value frugality and choose to wait or opt for the cheapest option.
Cultural Influences: Cultural upbringing plays a large role in shaping how we view money. For instance, New Zealand has a strong DIY culture, where being resourceful and self-reliant is valued. This might lead people to find value in doing things themselves rather than paying for services.
Anchoring: The concept of anchoring in behavioural economics refers to our tendency to rely heavily on the first piece of information we encounter. For example, if we see a product initially priced at $300 but later on sale for $200, we may perceive the $200 price as a great deal, even if the product’s real worth to us might be much lower.
Practical Strategies to Understand and Manage Subjective Value
Determine Your Financial Priorities: Reflect on what really matters to you. By understanding your priorities, you can start to spend more intentionally on things that bring true value to your life and cut back on the things that don’t.
Evaluate Purchases Based on Long-Term Value: Before making a purchase, ask yourself whether it will bring long-term satisfaction or benefit. Research suggests that spending on experiences (like travel or hobbies) tends to bring more lasting happiness than spending on material possessions.
Beware of Emotional Spending: Emotional spending often leads to assigning inflated value to purchases. When in doubt, take a step back and assess whether the item or service is truly worth the price, or if your emotions are pushing you toward impulsive spending.
Behavioural Triggers: How Psychology Drives Financial Decisions
Our brains are wired to make financial decisions based on behavioural triggers – those automatic, subconscious impulses that influence us to act in certain ways.
Some of these triggers lead to sound financial decisions, while others result in detrimental habits, such as overspending or failing to save. Identifying these triggers and understanding how they work can help us create positive financial habits.
Common Financial Triggers
Loss Aversion: Psychologically, humans fear loss more than we appreciate gain. This concept, known as , afraid to realise a loss. On the flip side, it can also lead to panic, causing many people to sell off stocks because of the perceived loss instead of holding them through into the recovery period. It can also lead to over-cautiousness, preventing us from taking financial risks that could result in long-term benefits.
Instant Gratification: . The availability of credit cards and Buy Now Pay Later (BNPL) services plays into this, encouraging us to prioritise short-term pleasure over long-term financial health.
Herd Mentality: Humans are social creatures, and we often look to others when making decisions, including financial ones. This is known as herd mentality. Seeing others buy a particular product or make an investment can influence us to follow suit, even if it’s not in our best financial interest. During the 2020-2021 cryptocurrency boom, many investors were driven by herd mentality, jumping into risky investments without fully understanding them.
Strategies to Develop Better Financial Habits
Pause Before You Purchase: If you’re prone to instant gratification, implement a 24-hour rule. Wait at least one day before making any non-essential purchases to see if you still want them after the initial impulse fades.
Set Up Mental Guardrails: To avoid falling into herd mentality, establish personal financial rules that guide your decision-making. For example, decide in advance how much you’re willing to invest in certain types of assets and stick to your plan, regardless of what others are doing.
Reward Yourself for Long-Term Thinking: To counteract loss aversion and instant gratification, try rewarding yourself for making long-term, prudent decisions. This could be as simple as celebrating financial wins (like paying off debt) with a small, planned treat.
The Role of Emotions in Financial Behaviour
Money is often tied to strong emotions – whether it’s the excitement of a new purchase, the stress of an unexpected bill, or the anxiety of checking a dwindling bank account. Understanding how emotions affect financial decisions is key to developing a healthier relationship with money.
Common Emotional Drivers
Fear: Fear of financial instability can drive people to hoard money or avoid taking necessary risks, such as investing for the future. This can lead to missed opportunities for growth and financial security.
Guilt: Many people feel guilty about spending money, particularly on non-essentials, even when they can afford it. This guilt can stem from a belief that money should only be spent on necessities, or from societal or familial expectations.
Stress: Financial stress is a common experience for many New Zealanders, particularly in times of economic uncertainty. Stress can lead to poor decision-making, such as avoiding dealing with financial problems or making impulsive purchases to relieve negative emotions.
Techniques to Manage Emotional Influences
Acknowledge Your Emotional Triggers: The first step to managing emotional spending or financial stress is recognising and acknowledging your feelings. Are you spending because you’re stressed, bored, or unhappy? Are you avoiding dealing with your finances because it’s overwhelming? Naming the emotion can help you manage it in a healthier way.
Create a Spending Plan That Includes ‘Guilt-Free’ Spending: If guilt is a major factor in your financial decisions, create a spending plan that allocates a small percentage of your income for guilt-free spending. Knowing that you have a budget for discretionary purchases can help alleviate feelings of guilt.
Automate Decisions to Remove Emotion: One of the best ways to prevent emotions from clouding financial decisions is to automate them. Set up automatic transfers to savings and investment accounts so that you’re saving regularly without having to make an emotional decision each time.
Maintain Financial Mindfulness: Mindfulness can help you stay in control of your financial behaviour by grounding you in the present and reducing emotional reactivity. By regularly checking in with your emotions and financial goals, you can make more deliberate, rational choices.
How to Change Your Financial Habits for Long-Term Success
Now that we’ve explored the psychological factors behind financial decision-making, how can you implement lasting change in your financial habits?
It all starts with self-awareness, goal setting, and building better habits.
Step 1: Increase Your Financial Self-Awareness
Start by reflecting on your current financial habits and the emotions or triggers behind them.
- Are you an emotional spender?
- Do you struggle with guilt when making purchases?
- Do you tend to follow others’ financial decisions without thinking about your own goals?
By identifying your personal financial tendencies, you’ll be better equipped to change them.
Step 2: Set Specific Financial Goals
Once you understand your financial tendencies, set clear, specific goals.
For example, rather than saying, “I want to save more,” set a goal like, “I will save $5,000 in the next year by transferring $100 into a savings account each week.” This creates a concrete plan that holds you accountable.
Step 3: Automate Good Financial Habits
Automating your financial decisions, such as saving and investing, can remove the emotional component and make good financial habits easier to maintain.
Set up automatic transfers for savings, debt repayments, and retirement contributions.
Step 4: Regularly Review Your Progress
Just like any other area of personal development, your financial habits require regular review.
Set aside time each month to assess your financial progress and make adjustments where needed.
Financial tools like the moneyfit.me Tracker or services like enable.me can provide guidance and support as you work towards better financial habits.
Mastering the Psychology of Money
Understanding the psychology behind your financial decisions is key to gaining control over your financial life.
By recognising how you assign value to money, identifying behavioural triggers, and managing emotional influences, you can develop better financial habits that support long-term success.
Whether you’re looking to save more, spend more mindfully, or invest in your future, it all begins with self-awareness and intentional decision-making.
If you’re ready to take control of your financial wellbeing, consider if our moneyfit.me Kickstarter course might be suitable for you. Start your journey towards financial health today and experience the benefits that come with a well-managed, stress-free financial life.
Just an option, obviously you could go for days on this one. But a big thing behind material purchases is to keep up with appearances is fulfilling the primordial need of acceptance by the tribe, which our ancestors relied on for survival. But this could be a whole separate topic for another article around hierarchy of needs.
