Money mindset: Understanding the psychology of money.

5 minutes
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Your money mindset may be the difference between achieving the financial freedom you’re looking for or feeling that that is always out of reach. By better understanding why you feel the way you do and implementing small steps to make changes you’re better placed to improve your relationship with money.

Three important things to know about the psychology behind your relationship with money:

  • Money is about emotions, not just finance.
  • Anxiety or avoidance of money issues may create a vicious cycle.
  • Your upbringing may affect how you manage your money.

Australians worry about money more than anything else in life. Finances regularly top our list of worries according to research from the Australian Psychological Society.

The rational consumer is a myth that is debunked with the fundaments of behavioural economics. We factor in intuition, emotion, norms, availability, and a whole host of other biases, when making decisions, that make it next to impossible to make a 100% rational purchase decision. Equally, we’re not entirely rational with our money management. Budgeting is one of the biggest tools available to people to help them take control of their money, to achieve their financial goals and set themselves up for long-term success. Yet, many people don’t create and follow a budget, even though it is in their best interests.

If you’re like most people, you may recognise that money is something with which you have a complex relationship. Your personal finances are a set of data points, challenges and opportunities that you rightly have feelings about. Your relationship with money is not fixed, it’s one that evolves over your lifetime.

Here are three important things to know about the psychology behind your relationship with money:

  • Money is about emotions, not just finance.
  • Anxiety or avoidance of money issues may create a vicious cycle.
  • Your upbringing may affect how you manage your money.

Money and emotions.
A change in our financial situation starts with a change in how we think about money. Clearing out the negative thoughts about money will remove the blockages that are preventing money from staying in our pockets.

According to Sarah Brown-Shaw, a senior financial counsellor at the National Debt Helpline, common emotions that people dealing with financial stress feel are fear and shame. For people who feel this way, it’s important they take some time to become aware of their emotions relating to money. With awareness, you can unlock the key to rational thinking and take positive actions.

Some common fears include the fear of not having enough money and the fear of missing out.

Shame is one of the most powerful emotions associated with personal finance, according to Sarah Brown-Shaw. Here are just some of the possible versions of shameful feelings related to money:

  • I haven’t got enough money.
  • I’ve spent too much.
  • I’ve avoided creating a safety net.
  • I spend too much on things I don’t really need.

Hidden shame often drives self-destructive behaviour, including avoidance.

Anxiety or avoidance of money issues may create a vicious cycle.
How do you know if you’re avoiding reality when it comes to finances? Here are some of the clues:

  • You try to put money and finances out of your mind.
  • You avoid talking about money with family and friends.
  • You avoid opening bank statements or credit card bills.
  • You don’t know what your credit score is.
  • You don’t know your net worth.

If you can relate to any of these behaviours, it may be time to look at your relationship with money.

Your upbringing and its impact on how you manage money.
Every family has its own psychology of money. This can govern what can be talked about, who controls money and what money responsibilities are assigned within the family.

Many people have a money story that’s not serving them well. Your money story is the narrative you tell yourself about your finances. To make empowered financial decisions, you should understand your money story. To do that, it helps to know how different influences have impacted your view of money, and how you use it in your life. These influences can be from our family or our culture. For example, if, as a child, you watched your parents, caregivers or other influential adults try to hide financial mistakes, or worry about money-related decisions, it may lead to anxiety about money in your adult life.

What’s important to remember is that you aren’t defined by your money story. With awareness, insight and knowledge you can take control and start working to make empowered decisions about your money - even if you haven’t had fantastic money management role models.

Taking action.
If you’re struggling with your relationship with money, here are some simple actions to get your money matters back on track.

  • Tracking your income and your spending is critical to healthy finances.
  • Develop a budget. For some people, making a budget seems like a daunting task. Instead of seeing it as restrictive, a budget can be a healthy habit to boost your personal wellbeing.
  • Automate where possible. If you’re earning, setting aside a regular automatic deposit into your savings account can help you reach your savings goals. Also, you can try setting up automatic reminders to alert you when a bill is due.

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness for the information to your own circumstances and, if necessary, seek appropriate professional advice.

Lali Wiratunga thumbnail image

Lali Wiratunga

Lali Wiratunga believes in encouraging positive financial behaviours to boost people’s financial confidence. He also advocates for the role of innovation, creativity and entrepreneurship in helping people and organisations deliver social impact and financial sustainability. In 2016, Lali was recognised for creating a positive impact through Pro Bono Australia’s Impact 25. Following a career as a corporate lawyer and management consultant in the UK, he's had 14 years experience in roles across financial services in Australia. He has served in the community as a Board member of a disability services organisation, and as a member of the Alumni Advisory Board at UNSW Business School.

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