What is Financial Psychology? | Morning star

“Until you make the unconscious conscious, it will rule your life and you will call it destiny.” – Carl Jung

Many of the choices people make regarding their finances are the result of unexamined attitudes and beliefs they have about money, its role in their lives, and how best to use it in the pursuit of one’s life goals.

What is Financial Psychology?

Financial psychology is the study of why we do what we do with our money. It is a broad field that encompasses the cognitive, social, emotional and cultural factors that come into play when people make financial decisions. Simply put: Financial psychology is about the human (as opposed to the numerical) side of financial trade-offs.

For example, when someone inherits wealth after the death of a loved one, they may sometimes find it difficult to spend or enjoy that money because it feels like a betrayal of their loved one to take advantage of the death in any way. It has nothing to do with the money itself and everything to do with the grieving process, but it affects financial behavior.

What makes one person a heavy spender and another a diligent saver? It’s probably not their age, income, education or gender, but the way they each think and feel about spending and saving. It is our thinking that drives our behavior. If you want to make a lasting change in your financial behavior, start by knowing your own mind.

How does psychology affect financial choices?

Some financial decisions can be explained by cognitive psychology, which is focused on how the brain organizes, processes and retrieves information. Take, for example, loss aversion: The human brain feels the pain of a loss as greater than the joy of an equal gain. It is cognitive. We cannot change tab version; it’s just how our brains work. When it comes to cognitive psychology, much of the time the best we can do is educate ourselves on how we can unconsciously misjudge trade-offs and then consciously compensate for that misjudgment.

Other financial decisions are influenced by social psychology, which focuses on how we relate to ourselves and others. For example, someone may associate wealth with greed or exploitation because they grew up around people who vilified the rich. Another person might believe that financial success will win them friends, and thus enjoy buying rounds of drinks for others when they socialize. These beliefs are the result of social psychology. In these examples, an attitude or belief that may start as unconscious can be made conscious or changed if the person wants to do the work to change it.

The beliefs and attitudes we hold about money have a profound, but often unexamined, effect on our financial behavior. Some people associate money with opportunity and freedom, so they use it to open doors, fund adventures, and create memories. Others associate money with safety and security and hold on to as much as possible to maintain peace of mind. If these two are spouses, there is a high potential for conflict over financial priorities. Arguing about which behavior is “right” is likely to be fruitless, but understanding the deep psychological need that each behavior serves can lead to shared understanding and creative problem solving.

How can financial psychology help me?

You don’t have to be a financial mess or have major financial problems to benefit from financial psychology. Understanding your own financial attitudes and beliefs can help you make better decisions, improve understanding and communication with loved ones, and ultimately help you align your finances better with your priorities and goals.

A healthier financial mindset can also improve your quality of life, even if your finances don’t change at all. There are some attitudes and beliefs that are strongly associated with financial well-being and others that are associated with financial stress and dissatisfaction. Learning the basics of sound financial thinking is a simple way to improve your financial quality of life and decision-making.

Get started

If you want to make changes in how you handle your money, a good place to start is to take stock of the attitudes and beliefs that you currently have about money and ask, “Is this healthy? Is this serving me well? Is this even true?” If the answers are no, you can begin to challenge and reshape these beliefs.

Here are a few questions to get you started. There are no right or wrong answers. The purpose of these questions is to illuminate how you currently think and feel about money.

1. Finish the sentence with one words: “Money is __________________.” Why do you think this is true? What experiences or observations have taught you this?
2. If money were a character in the story of your life, would it be a hero or a villain? A friend or a foe? Why?
3. What was your financial situation like growing up? How did the people who raised you handle their money? Do you see any ways this affects the way you think about or handle money today?
4. How does money affect your social life, for better or for worse?
5. If money wasn’t a consideration, how would you live your life? Would it be very different from how you currently live? How do you feel about it? Can you see these feelings coming up in your financial behavior?

Finally

When you make the unconscious conscious, you are no longer guided by habit and reflex. By applying a conscious lens to the attitudes and beliefs that drive our behavior, we allow ourselves to make changes where they can have the most impact: in our thoughts.

When thinking about change, behavior naturally follows suit. Stay tuned for more on how to challenge and change problematic financial attitudes and beliefs.