Psychology may affect your financial decisions more than you realize. Learning how to recognize and improve your financial thinking patterns can have a drastic effect on your financial future.
From choosing between spending or saving to paying with cash or credit, you make some type of financial decision almost every day. While everyone may be met with the same choices, your unique personal circumstances and experiences with money distinguish your financial mindset from everyone else’s.
Why are some people savers and others spenders? Why does one person tend to overspend and another live frugally? Why are some comfortable with the risk of investing money, while others fear the stock market? There are no straightforward answers to these questions, but a good starting point is to explore the nooks and crannies of your financial mind. Your financial thinking may be simple or complex, but understanding your mindset—the foundation of your financial health—can help you reach your financial goals.
Childhood: Your Financial Mindset Develops
Can you remember when you first learned about money? Many of your basic values and attitudes toward money develop when you are young and stay with you throughout your life.
Children observe how their parents interact with and manage money. Some parents educate their children about spending and saving, while others never talk about money. Some parents teach their children about money by allowing them to do chores for an allowance, while others freely give their children everything they want.
Whatever your financial scenario was while growing up, it influences your feelings and beliefs toward money and is the foundation for the financial mindset you have now. You may model your parents’ behavior or you may choose an opposite approach to your finances. Either way, you’ve developed attitudes toward money and biases, or patterns of thinking, that you incorporate into your own financial life as an adult.
Some people acquire a healthy financial mindset and a solid foundation for how well they will handle their money as adults. For others, dysfunctional family finances created a shaky foundation and a more difficult road ahead for dealing with their finances in adulthood.
Life Experiences Influence Your Financial Mindset
Each stage of life includes both major and minor life experiences that affect how you think about your finances. Some people have adequate financial resources to afford both everyday expenses and major financial commitments. Others constantly struggle to pay for even just basic needs. Stress—especially financial stress—from life experiences can impair your financial thinking, leading you to feel out of control.
Your financial mindset not only affects the way you approach life experiences, but it can also change over time. You may make financial mistakes: do you learn from them or repeat the offense? Have you decided that you are comfortable accumulating a lot of debt with student loans and a home mortgage? Have you become reliant on credit or loans to pay for every life experience you encounter?
Society Influences Your Financial Mindset
In addition to life experiences, the social pressures of modern society influence the way we think about our finances on a day-to-day basis. What influences your spending? TV and advertisements? Family, friends and acquaintances in your social circle?
Peer pressure and scrutiny from our social groups affect our financial mindset as we consider everything from our salaries to the size of our living spaces to our latest gadgets. The desire to fit in with our social group—or rather, to avoid being excluded—drives people of all ages to spend money to keep in step with their peers.
To complicate the matter, society has evolved into an “instant gratification” mentality, making it seem normal to buy what we want as soon as we want it. Making purchases instantly through our smartphones is easy; sometimes all you have to click is the “buy” button. Using your credit card allows you to pay for all of your purchases later. And while we’re giving into our desires, we continue to want more, more, more. Delaying gratification until we’ve saved enough money to buy what we want has become a mindset of the past.
Your Financial Future: Confronting the “Unknown”
Eventually, your financial mind will have to confront one of the most difficult obstacles: planning for your financial future. Because your future includes many unknown and “unknowable” variables—such as life expectancy, your health and more—thinking about your impending financial situation can be challenging. In addition, many of the issues surrounding health and death can be psychologically difficult to grasp. As a result, some fall into the trap of procrastinating about their financial future and saving and planning for those expenses.
Keep in mind that when you postpone establishing a living will, considering long-term disability insurance or creating an estate plan, this can significantly affect your future quality of life and the legacy you leave behind.
Five Ways to Improve Your Financial Mindset
You know you must have money in order to function in life. But just because you know this doesn’t mean you approach every money-related situation with rational, objective thinking.
It’s important to recognize that your financial mindset can help or hinder you from reaching your financial goals. Vulnerability to attitudes and personal biases can lead you to make irrational decisions. You can’t alter damaging financial behaviors until you alter your mindset, but once you identify faulty financial thinking, you can reach your highest financial potential.
The following five ways can help to improve your financial mindset, so you can reach your financial goals:
- Take control of your finances. Financial stress tends to make us feel out of control, which impairs your financial thinking. Recognize that you have the ability to change your financial mindset, including the harmful decision-making patterns that prevent you from meeting your financial goals.
- Determine your financial goals, and shift your behaviors toward those goals. Once you realize you can control your financial mindset, the next step is to construct a personal budget and a financial plan. Even if you just get the basics down on paper, you’ll have a blueprint of your financial situation.
- Learn from your financial experiences. If you have made financial mistakes in your past, figure out how to avoid making the same errors again and move on.
- Remember to spend less than you earn. No matter your financial mindset, this is always an essential rule to live by.
- Conduct regular “reality checks” on your financial mindset. Your money mindset can change throughout your life. A regular “reality check” will ensure that your thinking is on track to meet your goals.
As a partner in your financial journey, Planning Capital Management is here to help you identify roadblocks in your financial mindset and support your financial well-being.