The Importance of Knowing Your Money Mindset

The Importance of Knowing Your Money Mindset
The Importance of Knowing Your Money Mindset

Money may involve percentages and compound interest, savings scenarios and formulas, but the logical comfort of math does not make our response to a crisp Benjamin any less emotionally driven. But once you know your money mindset it is possible to rationalize your conscious mind away from automatic habits and disentangle the emotion from the wealth management process.

The psychology of our relationship with money is a multi-layered tapestry we’ve been quietly weaving all our lives. Our views are a combination of lived experience and the early lessons we learned from our parents and family members. These preconceived ideas about money linger throughout our lives. They have the potential to color how we view wealth accumulation and the decisions we make along this journey.

As best-selling author Morgan Housel, the author of The Psychology of Money, puts it: “We tend to be taught finance like it’s a math-based topic, like it’s physics or engineering or something like that. And in a math-based topic two plus two equals four … there is one right answer for everyone. Money and finance are not that. The way we make investing decisions and money decisions, personally or in a business, differs from person to person based on the generation you are from, the country that you live in, the culture that you live in, what you value, your risk tolerance, your time horizon.”

Whether we like it or not, all these factors impact our financial and investing decisions. And yet most of us are blissfully unaware of our psychological response to money, where our money habits come from, our type of money mindset and how we respond to risk. We seldom question why we overspend or underspend and how our approach to money impacts our investment approach and savings goals.

The Birth of Money Habits

A survey of 1,550 American consumers in January 2021 by LendingTree, showed that 47% of respondents learned about finances from parents and family members. Only 39% said they had taught themselves and a low 29% were taught about money management at school. And yet, despite the majority carrying family beliefs about finances throughout their lives, 35% of us feel we know more about finances than our parents – particularly earners in the six-figure bracket.

This shows that our family’s money mindset does not have to be our approach. We can change our views and, like younger generational cohorts such as the Gen Zs (born between 1997 and 2012) and millennials (born between 1981-1996), we can actively decide to learn more about finances and money myths by engaging with others on the likes of social media platforms.

While I would certainly not recommend going the social media route – indeed, I would always suggest making time to talk to a professional financial planning expert like myself – forming a habit of constantly educating yourself about money, investments and financial opportunities is the most powerful way to dispel outdated views and to switch your money habits.

Understand Greed and Fear

Greed and fear, and our response to both of these emotions in the context of money, are primary influencers when it comes to decision making. They are particularly dangerous during moments of personal crisis or market stress when they might cause us to make reckless and damaging financial decisions.

Successful investors have the ability to take emotion out of their investment thinking, they understand their mindset buttons because they’ve interrogated them and educated themselves about the world of finance. In the process, these individuals have learned the importance of being both realistic and rational.

For instance, if you know that losing money is painful and challenging for you, then wouldn’t you seek out low-risk investments? Or, better still, you could speak to your financial planner about ways to diversify your portfolio sufficiently to ride out both the good times and the bad times without setting your nerves on edge.

Get to Know Your Money Mindset

If you aren’t sure about your risk tolerance, your view on loss and the fear triggers that keep you locked into a particular type of asset class or financial planning approach, then consider these money personality types (adapted from the work of author Ken Honda) and decide where you fit in:

  • The Constant Saver: Do you view money as a source of security? Are you frugal and responsible when it comes to money? Are you obsessively saving to the detriment of enjoying the fruits of your hard-earned wealth in the here and now?
  • The Emotional Spender: Do you spend unnecessarily and often due to emotional drivers? Do you feel remorse afterwards?
  • The Hybrid Saver-Spender: Can you be both diligent as a saver and yet, on occasion, throw caution to the wind and spend on impulse?
  • The Moneymaker: Are you constantly driven to earn more, become wealthier, gain more recognition? Is this your ultimate driver?
  • The Gambler: Will you take big risks and then fall into the depths of despair over significant losses?
    The Worrier: Do your fears hold you back from making financial decisions? Do you lack the confidence in your abilities to secure your own financial future?
  • The Not-Bothered: Do you hardly give money a second thought? Does it factor into your decision making? Do you have enough to be unfazed?

Once you know your money mindset type it becomes easier to moderate or change your behavior.

A Word About Priorities

Behavioral scientist and author Ashley Whillans tells us that generally people devote too much of their focus to making money and not to prioritizing time. She explains that even the mega wealthy make the mistake of believing that more money will enrich their lives. This is a common money mindset, but research tells us that this approach doesn’t make us happier.

Whillans suggests finding ways to attribute value to time-based activities such as nurturing relationships and social connections. She suggests ascribing worth to time and making it a priority in much the same way we applaud saving behaviors or investment savvy.

This may not be a traditional approach to money mindset health, but it might build in a layer of personal happiness and wellness which we don’t usually associate with a balanced portfolio. After all, as Macedonian author Ljupka Cvetanova wrote in The New Land: “If time is money, how much is a lifetime?”

If you’d like further help understanding your money mindset, and putting a plan in place to help take control of your financial story with confidence, then please do get in touch.

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