The Psychology of Money

Have you ever wondered why you handle money the way you do? Perhaps you are a saver and you feel satisfaction every time you look at your growing account balance and displeasure when you need to buy something. Or maybe you are a compulsive shopper, looking at life as something to enjoy, so you buy on impulse and pay little attention to how you will survive in the future.

Why we are so different when it comes to money?

While many people believe that money-handling habits come from parents or caregivers, current research points out that our habits are not just based on conditioning and money management lessons we learned as kids. There can be spenders and savers within the same families, kids who grew up in poverty and still develop great wealth, and people who blow the family fortune.

Why are some of us natural savers, while others are spenders? In a way, it’s a matter of perspective.

The main difference is that savers take in the big picture, while spenders only see things as they are, or as they appear to be at that moment in time.

Spenders

If you are a spender, most likely you cannot delay the enjoyment or gratification. With cash in front of you, just like the candy, you cannot resist the urge to have it right now even if you would have more later. That is why you don’t have much savings in the bank. You are happy making purchases and enjoying them in the moment.

If you’ are trending toward extreme spending, then you probably should kick or curb your habit.

These six ways to calm your impulses will help you cut back on spending:

• Do not use credit/debit cards. By using cash, you force yourself to consider just how much you’re spending.
• Withdraw cash from your bank account yourself, so that you can see the dwindling balance.
• Set personal savings goals. If you tell close friends and family how much you intend to save and by what date, they’ll hold you accountable. You can even use personal goal setting tools to put money on the line to achieve your long-term financial goals.
• Reward yourself when you meet your savings goals, but only by spending a responsible percentage of what you saved. This can help prevent frugal fatigue.
• Stop and ask yourself before each and every purchase whether or not you truly need the item. Know the difference between needs and wants.
• Consider your future, no matter how uncomfortable it is. Ask yourself questions like how much money you’ll need to retire, or how you’ll pay for your child’s college education.

Savers

On the other side are savers.

In an experiment, adults were given the choice of receiving Rs. 5000 immediately or waiting a year and receiving Rs. 10000. Many participants surprised researchers by taking the Rs. 5000. The instant gratification appeared more valuable than doubling the earnings after a delay. Savers are the rare ones who sacrifice plenty of gratification to make sure to get the full Rs. 10000 when it is available.

While many people take pleasure in buying things, savers do not feel that same way. Instead, savers are uncomfortable with shopping, and feel real emotional pain when they pay.

What brings them pleasure as a saver? Are they missing out on some of life’s simple, inexpensive joys? Are they sacrificing too much and endangering their health?

A saver tries to earmark funds to provide for present needs, and for life in the future, whether that future is 10, 20 or even 40 years away.

These four ways can calm your nerves in the event of expenses:

1. Do not sweat over everyday expenses. Use your money management skill to pay what you must and invest your mental energy in generating more income.
2. If you are generally saving a good portion of your salary, let us say 30-40%, there is nothing wrong with an occasional indulgence such as buying an outfit or taking a vacation.
3. Do not deprive yourself of healthy choices.
4. Do not let expenses cause you emotional pain. Try to balance short term expenditure without jeopardizing long term goals.

Sometimes a personal financial trainer can help

Let’s face it – there are pros and cons to both sides here. Spenders can be incredibly generous people, probably because they are not very concerned with holding on to their money. But spenders can also make impulsive decisions and end up with nothing to show for their hard work.

Savers, on the other hand, tend to be naturally patient and more responsible, but they can also become tight-fisted and have trouble spending—or giving—a dime. That’s no way to live either!

Neither is clearly better or worse than the other. But it is important to figure out which type of money personality will direct you toward wise decisions and money habits that are right for you.

In order to live a balanced financial life, a person needs to get hold of their detailed view and become more adept at seeing the broader picture.

Making a fundamental change can be difficult to do alone. It can sometimes take ongoing, professional support to make this change. A professional can help you to slowly change your perception, and find a balance between the two mindsets i.e. spender’s mindset versus saver’s mindset.