5 Things About Money and Psychology You Need to Know


If being money savvy was simply about learning a few basic principles, establishing a few habits, and creating simple systems, there would be more people in the world with a solid financial footing.

But the reality is, it’s not just about following a financial blueprint. Even if we were given access to said blueprint, we would still have to figure out one huge obstacle – how to get out of our own way.

Whether we are aware of it or not, we have a far more complicated relationship with money than just being aware of the dollars and cents in our wallet or the number tied to our bank account.

If your financial situation is in shambles, you might just be the one sabotaging your own progress. Here are a few money and psychology ties that you should be aware of.

There is a payback for not following through with change

This is just one of the many reasons why New Year’s resolutions often carry no more weight than the wish we make when blowing out candles on a birthday cake.

We don’t do things that we don’t receive some kind of payback for – granted, the reward may seemingly be negative in nature, but it’s still something we’ve convinced ourselves we need or want.

For instance, if we receive sympathy or pity for a common complaint that we have about our lives – a cheating spouse, a dismal bank account, an awful job – we could actually be avoiding changing what’s irking us in order to continue to receive what feels like love and support from friends and family.

If you’ve identified that you overspend when you’re feeling poorly about yourself, but you haven’t established another habit that mimics that relief, you’ll avoid change in order to stick with the payback you get from overspending.

If there wasn’t a payback for sticking with the status quo, wouldn’t you have made the changes you needed to make already?

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Biases affect the decisions we make

From the time we enter into this world, our slate is no longer clear. Our experiences, our environment, our friends and family, shape who we are and how we view the world. Thus we establish biases.

When it comes to money, biases can sometimes be the driving factor behind making key decisions. The bandwagon effect, for instance, can convince us that something is true simply because other people say it is. Or the status quo bias can keep us stuck with the same financial institution or the like simply because we are used to it.

The quicker and less informed we are when it comes to making financial decisions, the more likely we are to lean on these deep-rooted biases that we might not even know are there.

Money beliefs shape what comes to us

Just like biases, beliefs are often established very early on by taking notice of our environment and the actions of those around us. If our parents spent money blindly and the lack of money caused stress and tension, we could have then established a belief that money equals anxiety and it’s best to avoid the topic altogether.

Our beliefs are at the core of many of the decisions we make surrounding money which, in turn, severely affects the physical reality of our money situation. Avoidance could in turn lead to debt, calls from credit collectors, and a dismal financial picture.

If you notice patterns in your money situation – the same stuff, different day – there is likely a belief turning that wheel and causing it to come back around. That’s when it’s time to do some digging.

We tie money to much more than just a means of exchange

There are many neutral things in our lives – things that cause no emotional reaction whatsoever – money is not one of them.

Money is not just a physical thing that we use in exchange for goods and services, over time we’ve intertwined it with our self worth, success, status – the list goes on and on. Therefore any money problem is usually not just a money problem, it goes much, much deeper than that.

Tying money to surface things like status quo can quickly undermine any sound financial decision you may make when considering just the dollars and cents of a situation. If you’re struggling to show you are enough or better than money is suddenly no object and your financial bottom line can suffer greatly.

After all the Jonses are a tough group to keep up with.

High earners encounter the same psychological obstacles as low earners

In order to really drive these points home, it’s important to note that more money is not the only answer to your money problems.

High earners are not immune to the problems that low earners often face. Some struggle to make a six figure salary stretch enough to cover their bills, some still end up in bankruptcy court, some still lose their homes to foreclosure.

Money isn’t necessarily the problem. Their relationship to money and the psychology behind their decision-making, however, is.

Therefore, while earning a higher income can certainly patch up some shortfalls, it’s not going to make everything perfect overnight. Dealing with these underlying factors are what will actually create lasting change in your financial life.

Image credit: leeser

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  • Dee

    I think you make a really great point here that it is possible to have a high income yet still be in a crummy financial situation. It’s about your financial aptitude and how much you know, but also about putting that knowledge to work.

    • Yes, that’s very true. Across all incomes, there are people who are working to improve their behaviors and habits in relation to their finances. Thanks for the comment!