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How the psychology of money affects your wealth

How you feel about money can have a big impact on how you save, spend and plan for your financial future. By understanding the psychology of money and your own views, you can manage your money better.

Understanding your attitude to money can help you in your financial planning. Photo: www.freeimages.com.

Understanding your attitude to money can help you in your financial planning. Photo: www.freeimages.com.

How you feel about money can have a big impact on how you save, spend and plan for your financial future. By understanding the psychology of money and your own views, you can manage your money better.

The psychology of money, as psychologist James Gottfurcht describes it, is how our beliefs, expectations and feelings about money influence our financial behaviour and success or disappointment.

Money also has symbolic meanings that affect our behaviour, leading to feelings such as security, freedom, power, control and acceptance. By becoming more aware of our “money scripts” and how we may be sabotaging ourselves, he explained, we can rewrite those scripts to create more success.

Associate professor at Creighton University Brad Klontz similarly noted that the psychology of money focuses on people’s beliefs and behaviours related to money. Understanding your money personality, such whether you are a saver or spender, can help improve spending decisions that improve your financial health. THE PSYCHOLOGY OF MONEY AND YOUR FINANCES

This psychology of money affects more parts of our life than many of us realise. Money coach and author Denise Hughes observed that psychology and money are deeply woven together and most people don’t understand how important this relationship is to their overall happiness, as they live in their subconscious blind spots far too long.

By understanding your beliefs, money history, attitudes, experiences and current behaviours, you can create your current money picture and manage your earnings, savings, investments and debt better.

Financial advisers Brian Preston and Bo Hanson noted that the Zeigarnik Effect, a psychological tendency to dwell on an uncompleted task rather than a completed one, can affect your financial life. Failure to set up a basic financial plan, for instance, can result in tremendous stress and paralyse people into inactivity.

In addition, the Diderot Effect relates to how buying one item such as a car or a suit may make you believe that you need to buy additional items to “complete the package”.

Interestingly, research has also shown that money only buys happiness up to a certain point. A study by Nobel prize-winners Daniel Kahneman and Angus Deaton found that although people feel unhappier the further their annual income falls below US$75,000 (S$105,000), people also don’t report any greater degree of happiness no matter how much more than US$75,000 they make.

The reason is that lower income makes people feel more ground down by the problems they already have. That effect disappears at US$75,000, however, probably because people have enough money to do things that make them feel good.

Simon Fraser University assistant professor Lara Aknin and her fellow researchers also found that although people with more money are somewhat happier than people with less money, people who spend money on others report greater happiness.

USING PSYCHOLOGY TO MAXIMISE YOUR WELL-BEING

What does this and other research into the psychology of money mean on a practical basis in your daily life? It indicates that you can put yourself on track towards managing your daily finances better, saving for your children’s education and investing for your future if you take time to understand your money profile and change habits that cause lower savings or financial difficulties.

One of the first steps is understanding your feelings or expectations about money as well as your behaviours such as spending, saving and investing. If you figure out that you start using a credit card to pay for things when you’re unhappy about your income being too low, for example, you can start to change your behaviour.

The Klontz Money Script Inventory, a tool available online that was developed by Brad Klontz and fellow researchers, is one way to figure out your money profile. It puts money practices into four categories: Avoidance — avoiding discussion of money issues; worship — a desire to accumulate money; status — using money to show your status; and vigilance — keeping money issues private.

If you use this or another tool to understand your views about money, you can also use that knowledge to shift your behaviour.

Once you identify your emotional reactions to money, psychologist and Crazy About Money author Maggie Baker writes, you can learn to deal with money more effectively and enjoyably. “Even though you may still make mistakes, you’ll be able to identify when something goes wrong and fix it.”

What’s important, according to Baker, is real commitment, attention to detail, and looking at all the money facts such as bills, spending habits and goals.

Financial Psychology Corporation CEO Kathleen Gurney also suggests that people consider their personal goals and aspirations, then develop a plan for themselves.

A key point, she says, is that “it’s not money that makes you happy, it’s how you use it. If you don’t know how you want to use it to create happiness, it will be used indiscriminately and never achieve what you value most. The first step to living within your means is to focus on what’s most critical.”

To improve your financial well-being, then, a good place to start is understanding yourself.

Once you figure out whether you’re a saver or spender, a money worship or avoider, or something else, you can set your goals, develop a plan to improve your behaviour, and use the psychology of money to your advantage.

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