The psychology of money: How our attitudes and beliefs affect our financial behavior

Managing money might seem straightforward - just numbers and spreadsheets. But our financial decisions are deeply influenced by psychology, shaped by experiences, emotions, and cultural norms. Whether it’s your spending habits or investment strategies, your mindset plays a bigger role than you might think.

In this guest article, Kang Yen Joon explores how our beliefs about money influence financial behaviours and shares practical insights to help you make smarter choices. Once caught in financial pitfalls himself, Yen Joon now writes prolifically on personal finance for platforms like Singsaver, empowering readers to achieve financial success through knowledge and actionable advice.

Discover how understanding the psychology of money can transform the way you manage your finances.

The impact of money on mental health

Money is a big stressor for many, and worrying about money problems can trigger negative feelings such as anxiety, depression, and insecurity. 

According to a survey from Bankrate and Psych Central, 52% of those surveyed, cited money as the main factor that has affected their mental health the most.

If you have an unhealthy obsession with money, you may have a condition known as “money dysmorphia”. This term is used to describe someone who’s insecure about their own financial situation, even if they have financial stability. Sufferers may also feel constantly broke or anxious about running out of money, feel guilty when they spend money, or avoid spending money altogether despite being able to afford it.

Aside from that, the state of your mental health can also affect how you deal with and manage money. For example, you may lack motivation to manage your money or overspend if you feel depressed.

Strategies to alleviate financial stress for financial success:

The good news is that there are a few ways you can alleviate your financial stress and feel more financially secure:

1. Build an emergency fund that’s at least three to six months worth of expenses. This will give you something to fall back on for unexpected emergencies such as a job loss or sudden medical expenses. 

2. Have a budget for your essential needs, such as groceries, housing loans, utility bills, phone bills, and insurance premiums, while cutting back on discretionary spending

3. Reducing high-interest debts such as credit card debts

4. Building financial knowledge in areas of personal finance and investing

5. Investing your money to build your retirement nest egg  

Spending and saving habits

Your upbringing and personal experiences also shape your attitude toward money, spending, and saving habits.

For instance, those with a saving mindset tend to be more frugal and cautious about spending money, often avoiding impulsive purchases. They may also feel anxious about spending money, leading to missed opportunities or the fear of spending money even when necessary. This could stem from their upbringing, where parents instilled the value of money and encouraged the importance of saving.

In contrast, those who are characterised by a spending mindset may have grown up in a family that lacked financial management or knowledge. They prefer to spend money on experiences or materialistic objects that provide pleasure. However, this can lead to unnecessary spending or unmanageable debts.

Understanding your tendencies can help you develop better financial habits. For instance, you can automate your savings by saving a fixed amount every month. As a rule of thumb, you should save at least 20% of your monthly income or investment returns, as these factors significantly influence your spending and saving habits.

You can also allocate a monthly amount for discretionary spending to allow you to enjoy spending without guilt.

The psychology of investing money

In behavioural finance, it’s understood that investors don’t always make rational decisions; psychological influences and biases can sometimes lead them to make the wrong decisions. 

Therefore, it’s important to recognise these biases and how they can impair your investment decisions so that you can avoid them.

How to overcome behavioural biases

It’s important for investors to acknowledge that it’s impossible to have a foolproof strategy as losses will happen at some point along their investment strategy. Hence, focusing on your long-term goals can help you avoid making emotional biases.

Here are some simple rules for making more objective decisions:

• Diversify your portfolio across various sectors, asset classes, and markets to reduce volatility
• Conduct as much research as possible so that you can make an informed decision based on data and research
• Be realistic about your risks and goals
• Update your investment strategy
• Invest a fixed amount regularly regardless of the share price. Also known as dollar-cost averaging, this helps you to be less emotionally affected by market volatility and average out your investing cost over the long term

Debt and financial mindset

Your beliefs and attitudes around money also affect how you deal with debt. 

For instance, if you frequently spend your hard-earned money on material possessions to reward yourself, you could end up in uncontrollable debt and prevent yourself from paying it off. 

Similarly, if your mindset is “everyone has debt” and “I’ll never get my debt paid off”, you’ll struggle to get out of debt or find it difficult to be debt-free. 

Changing your beliefs and attitudes is one way to deal with your debt.

For example, while there’s good debt and bad debt, it doesn’t mean that you shouldn’t strive to pay off your debts. As all debts come with interest charges, paying them off will result in savings and avoiding the need to pay unnecessary interest. 

Financial planning and financial decisions

Proper financial planning can help us achieve our long-term goals. However, as outlined above, our emotions greatly influence our decisions. 

For example, fear and uncertainty can force us to make impulsive decisions or avoid taking risks. This can also lead us to become extremely conservative, hoarding our money instead of investing it for better returns.

Anxiety can cause us to be overly worried about our financial security. It can also lead to procrastination, which causes more stress over time and delays financial planning. 

Here are a few strategies to overcome procrastination:

• Focus on mental health: seek treatments such as cognitive behavioural therapy (CBT), counselling, or medication. 
• Mindset shift: studies show that you are up to 10 times more likely to complete a task if you’re internally motivated, so changing your mindset can help to get something quicker
• Simplify and break down tasks: start small and focus on the most important task. Then break down all the other tasks into smaller, more manageable parts
• Set a deadline: for example, having a savings target of S$20,000 in six months

Final thoughts: Integrating psychology into your finances

The psychology of money plays a significant role in our financial behaviours. By understanding the psychological aspects of money, we can develop better decision-making strategies to make better financial choices and achieve our financial goals. 

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A big thank you to Kang Yen Joon for sharing his unique perspective on the psychology of money. His insights offer a fresh lens through which to understand financial behaviour, inspiring readers to make informed decisions. Always consider your personal financial situation and seek professional advice when needed.

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