Financial Psychology and Your Financial Well-Being

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Financial Psychology and Your Financial Well-Being

There is more to lifestyle planning than budgets and savings and investing. There is also your psychology. That includes your personal values, your ideas about money, how you make decisions, and how you handle emotions. These are all part of the scope of financial psychology, the branch of psychology that explores how we think and act with money. Financial psychology helps us understand why we act as we do. Once we know the "why," it’s easier to start changing any behaviors that we need to change. And we can strengthen those healthy behaviors that we already have.

The role of values and behaviors

Our personal values are guiding principles that drive our behaviors with money. Not only do they help us understand our actions now, but they can predict how we will act in the future, for better or worse. Many of our values come from our culture. Many come from our families. You may be able to think of several cultural and family values that you practice. We also get some of our values from the media, from marketing, and from education. Here are just a few examples of values and how they play out:

• Valuing independence could mean you start a business or pay off debts as fast as possible.
• Valuing stability means you have plans for your money; you might be conservative with it … or you might take some risks to grow it.
• Valuing family means you spend less on your own wants and more for the family’s needs.

Try making a list of your values, and describe how you use them in your financial decisions. The same goes for behaviors. Make a list, and note how they affect your financial goals.

Your values and behaviors might shift over time as your priorities in life change.

Managing your emotions

Why do we talk about emotions in personal finance? Because they also drive our behaviors with money. Studies have shown that a large percentage of our financial decisions are based on emotion. This isn’t always a bad thing, because emotions are necessary in life. They can be used for either good or bad choices. Some emotions can work against our best interests. Fear or envy can make us spend money we later regret. Because so many problems can arise from negative emotions, we tend to focus on them.

On the other hand, emotions like anticipation and confidence could make us plan more wisely for the future and make better choices.

There are many things that individuals do to manage the emotions that affect their financial decisions. Here are some especially important ones:

Recognize your triggers. Your triggers are situations or thoughts that lead to strong emotions about money. If not managed, triggers can lead to overspending or other financial problems. It can take time to learn what your triggers are, but as you begin to see how they operate, you can predict the kinds of financial decisions they could lead to.

Practice delayed gratification. Delayed gratification is a very important skill in money management. It refers to the ability to resist immediate rewards in favor of a greater reward in the future. Although it can be hard to do at first, it can lead to greater satisfaction and better decision-making.

A certain amount of caution is good. Caution can work in your favor by controlling risk-taking behavior. When it comes to your money, it can help prevent you from acting unwisely.

Have a plan for your money. Being practical can help you manage your emotions. Create a plan with reasonable goals to achieve and action steps to follow. Be careful about being influenced too much by external sources, like peer pressure, social media, and advertising.

Have a long-term perspective. Your financial plans should consider your needs many years and decades into the future. Your future might also involve having a family and community to take care of. Therefore, having a long-term perspective makes delayed gratification necessary.