Introduction
Personal finance is an important life skill, and while you can learn the hard numbers of what it entails, it’s crucial to understand the psychology of spending and saving money as well. Without understanding how our emotions and mindset affect how we use money, any attempt to manage our finances in a more responsible way can be ineffective.
Saving money often requires us to develop better habits and discipline; it also requires understanding the motivations behind our spending behaviours. To get to the core of why we spend, we need to look at our attitudes toward money and what drives our decisions to spend.
What Is the Psychology of Spending?
The psychology of spending is the study of understanding how our emotions and mindset affect how we use money. We all have different money personalities and spending behaviours, influenced by our cultural, social and personal experiences. When we discover what drives our spending decisions, we can better assess our behaviour, set realistic goals and make better decisions.
In general, our attitude towards money usually consists of either a scarcity mindset or abundance mindset. Those with a scarcity mindset believe that money is limited, difficult to attain and must be tightly managed and hard-earned. On the other hand, an abundance mindset focuses on an abundance of resources, perceiving money as a way to build wealth and pursue our goals. Having an abundance mindset emphasizes the importance of setting goals and investing, while still managing to balance your budget.
Identify Your Money Personality
Knowing and understanding your money personality can be extremely helpful when it comes to spending less and saving more. To find out your own money personality, ask yourself:
• Do I spend more impulsively or save more consciously?
• Do I think of money as a tool for something greater or as a source of security and status?
• Do I view it as something that is easily earned or hard to come by?
• Do I worry about the risk of not having enough or focus on the opportunities that come from having more?
Your answers to these questions will help you determine where you fall on the spectrum of scarcity and abundance mindset.
Motivational Spending
Now that you understand the basic psychology of spending, it's important to understand the correlated factors that contribute to your spending habits and how to change them. Motivation is a key factor in how we use money - whether it’s to make ourselves feel good or to prove to ourselves that we are worthy of something. Understanding our reasoning for wanting something can help us determine if it’s a need or a want.
Often, our spending is a direct result of our emotional state. We may be searching for validation, or trying to forget or ignore certain feelings or emotions. We may be trying to show our family and friends how successful we are, or seeking a sense of control or stability that we don't have in other areas of our lives. When we identify our underlying motivations for spending, we can address these needs and focus on more productive efforts.
Changing Your Mindset
Changing your mindset towards money, spending and saving is the first step in being able to better manage your finances. It’s important to recognize that money isn’t necessarily bad or good, it’s what you do with it that matters. Developing a healthy attitude and understanding of money, start by asking yourself:
• What is the goal of my spending and saving?
• How will this money help me reach my goals?
• What am I sacrificing in the short-term for the long-term gain?
When we switch from a scarcity mindset to an abundance mindset, we begin to realize that money is a tool and a resource for us to use to achieve our goals and dreams. With this attitude towards money, we become more likely to practice conscious spending, prioritize goals and short-term sacrifice.
Practicing Conscious Spending
One of the most overlooked aspect of personal finance is understanding what psychological needs drive our spending. As previously mentioned, we often turn to shopping or spending money to satiate certain emotional needs. Whether we are trying to ease the stress of work or to chase after our own definition of success, it’s important to practice mindful spending.
Being conscious of our spending habits and reasoning often leads us to make wiser decisions. To practice mindful spending, identify your motivations for wanting something and if it aligns with your other goals. Consider the alternative ways to fill the need you have - for example, if you’re feeling stressed, find an alternative stress-reliever that doesn’t involve spending money.
Building Healthy Savings Habits
Saving money is either a habit you already have or one you need to practice. Depending on your money personality, this can either come naturally or require conscious effort. Having a savings plan can help make saving money easier.
• Start small: To begin, start small and aim to save a specific amount of money each month. Dedicate your money to your spouse, your future, your kids, your retirement etc. Each month, review your goals and make sure that these are the ones you’re contributing to.
• Automate: Another way to ensure that your savings don’t get overlooked is to automate your savings. Dedicate a certain portion of your income to your savings each month and watch as it grows month by month.
• Create an incentive: Lastly, create an incentive or reward system for when you hit your savings goal. Whether it’s setting aside money for a shopping trip or treating yourself to a nice dinner, find a way to make saving a fun and rewarding experience.
Conclusion
We all have different money personalities and spending behaviours. To better manage our finances and develop better habits, we need to understand the psychology of spending. Identify your money personality and determine the underlying motivations behind your spending decisions. Work to switch from a scarcity to an abundance mindset and practice being conscious of your spending habits. Create an incentive for when you reach your savings goal and make saving fun. Understanding the psychology of spending and saving can be just as important as learning the hard numbers of personal finance.
Good luck on better managing your finances!