Financial psychology: understanding your relationship with money

Jun 27, 2023

What’s your relationship with money? Are you a penny-pincher? A big spender? Or somewhere in the middle?

Understanding your financial psychology, or how you feel about money, is often the first step to improving your finances. Once you’ve developed an awareness of your relationship with money and any insecurities you may have, you can work to correct them and make your relationship a healthy one.

What influences your relationship with money?

How you feel about and use money often has a lot to do with your parents. If you were raised in an extremely frugal household, you may be hesitant to spend on nonessential items even when you can afford to. Or, if your parents were impulse buyers, you may have inherited that trait.

But it’s not always that straightforward. If your parents were frugal, you may have developed a counter mentality as a result, meaning you enjoy spending money because you didn’t get to as a child. Or if your parents mismanaged their money, you may have developed a penny-pinching mentality to compensate.

Your social circle can also affect how you spend money. If you hang out with people who like to indulge in impulse buys, you may find yourself doing the same. Or, if your friends are always complaining about money, that negative attitude may rub off on you.

Finally, how you view money can also be influenced by major events in your life. For example, someone who’s always been careful with money may have a near-death experience that pushes them to seize the moment and spend with less reserve. Or, if you experience a serious financial setback that makes you insecure about your finances, that may motivate you to hoard cash.

Which are you?

Let’s break down the six financial stereotypes. While these examples may be a little extreme, see if any of them resonate with you and your own financial mindset.

1. The Hoarder

This person feels they can never have enough money, and is willing to do almost anything to fill up that bank account, including bending the rules. No matter how much they have, they’ll always want more—not necessarily because they’re greedy, but because they’re insecure. After all, you never know when a recession or financial emergency may come knocking.

2. The Avoidant

Far from being obsessed with money, this person is obsessed with not thinking about money. While they may not really believe that money is the root of all evil, it does make them uncomfortable. If you bring up money matters, they’ll do one of two things: quickly change the subject, or boast about how money isn’t the aim of their existence.

3. The Miser

The most famous miser of them all is Ebenezer Scrooge: so intent on holding onto his wealth that he couldn’t even spare a penny for the poor at Christmas. A miser may be influenced by a poor childhood or a major financial setback that makes them wary of spending anything, even when they can afford it.

4. The Big Spender

The opposite of the miser, this person spends money when they can’t afford it. They may start out reasonably enough, with plenty of money in the bank and a couple of harmless impulse buys, but it’s a slippery slope that can lead to out-of-control spending and end with bankruptcy.

5. The Counter

Keeping track of your finances is important, but this person goes overboard. If there’s a single cent they can’t account for in their monthly budget, they’ll obsess over tracking it down, even if it takes hours.

6. The Freewheeler

This person is highly disorganized and a major procrastinator when it comes to paying bills and going over the budget. As a result, they often have no idea what shape their finances are in.

Improving your financial psychology

While you may identify closely with one of these stereotypes, you’re more likely to fall somewhere in the middle. Most people have some of these traits, and may even have had a time in their life where they fell pretty squarely into one camp or another, but in general, they’re a more moderate combination.

It’s important to realize that having an unhealthy relationship with money doesn’t make you an inherently bad person—it just means you’ve been influenced a certain way because of your upbringing, your past, and your life experiences. The good news is, it’s 100% possible to change and make your relationship with money a healthy one (and it doesn’t have to involve being visited by three spirits).

If you’re ready to improve your financial psychology, here are a few tips:

1. First, understand your current financial mindset and the reasons for it
2. Think about the mindset you would like to have
3. Set an achievable goal (starting small is fine)
4. Hang out with people who encourage good money habits
5. Avoid things that encourage bad money habits, like credit cards and social media
6. Celebrate when you achieve your financial goals

We often talk about mental health and psychology, but financial psychology is no less important, especially because it can play a role in your mental health and other aspects of your daily life. Understanding and improving your financial mindset is a great step toward self-reliance and sustainability, not to mention a healthier, happier mindset in general.

All of the material published on this web site is for information purposes only and does not constitute advice. This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a Financial Adviser, whether the information is appropriate in light of your particular needs and circumstances

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