Psychology of Money
Life Style

Psychology of Money


Psychology of Money

With the rise in the monetary value of all things around people, money has become a major topic of consideration in every household. It dictates the quality of life and plays a huge role in making any life decision. While you’ve surely heard the saying that “money does not buy happiness,” it plays a key role in enabling you to feel happy. It is definitely not necessary to be rich in order to be happy. It’s the mindset one has towards money that dictates its effects on one’s emotions. This article will help you reflect on your relationship with money, and the factors that influenced the nature of this relationship.

Read More: Money Matters: Explaining the psychology behind Inflation

Does money trigger your Emotions?

Behavioural Finance is the study of how human emotions and biases influence financial decisions. Let’s look at some emotions that can be associated with one’s financial status.

  • Fear: Earning money is a lot of hard work, but it doesn’t take nearly as much to lose it all. This thought might linger in your mind, creating fear. Fear can also be associated with status. One might fear that their financial status will be exposed to acquaintances, and they’ll be looked down upon.
  • Guilt: You might feel guilty when you notice that people around you have less than what you do. Sometimes, guilt fosters after a chunk of one’s life has passed trying to earn more money. This is when they realize the importance of time, and where/ who they should have spent it with.
  • Shame: A person might not be open about their poor financial conditions since they are ashamed, and do not want to be judged.
  • Envy: It comes from a place of desire when one sees people around them live more luxuriously. The feeling of envy might make you want to live someone else’s life, giving up on your own.
  • Pride: Some people might feed their egos with their monetary status. Showing off wealth might come naturally in this case. Most emotions triggered by money tend to be negative. Finances dictate people’s lives so much that many dedicate most of them to earning more. It can cause a lot of anxiety and stress as well.
  • Greed: Earning money can become addictive. As you get a taste of luxuries, it makes you want more. It sometimes becomes hard to see the simple pleasures of life. This is where the ambition of earning more comes in. When it does, it doesn’t easily leave you, making you greedy for money.
  • Loss Aversion: It is the phenomenon where people obsess over loss much more severely than do over equivalent gains. This is the human tendency to focus more on the negatives than celebrating the positives.

Also Read: The Psychology Behind Happiness

Money in Relation to the Brain:

Decision-making plays a huge role in finance. Investments, buying a house, insurance, or spending on wants- these are some places where your finances can be directed. While making these decisions, one should consider their financial status and spend carefully. Decision-making is centred on three main factors- perception of information, evaluation of profits, and implementation of the plan.

The prefrontal cortex plays an important role in decision-making as it is responsible for impulse control and rational thinking. The amygdala is a part of the brain that regulates emotional response, it lets a person reflect on threats or the fear associated with making wrong financial decisions. The Nucleus Accumbens is associated with reinforcement. Neural Activity in this part of the brain increases when presented with money, as it has been associated with materialistic gains.

Also Read: Psychology Behind Rich People

Has your Childhood Shaped Your Outlook on Money?

A person’s upbringing plays a huge role in influencing their money habits and the importance they give to their financial status. These influences can be positive or negative. In a household where parents save and calculate each rupee that they’ve spent, the child is likely to be more careful about spending.

Some negative parental behaviours that can negatively affect financial awareness are:

  • Spoiling your children; giving them everything they want
  • Avoiding conversations about money management
  • Having opposing views about the management of finances than your spouse
  • Being too stingy about spending

Teach your children about the importance of budgeting and saving. Set examples through your own behaviour, and make sure your spending habits remain consistent.

Read More: The Basics of Child Psychology

Summing Up

Money plays an important role in shaping one’s lifestyle. It not only contributes to one’s economic status, but it also plays a role in maintaining mental health. The happiness that you might seek from materialistic objects might take away your peace if focus on too much. It dictates the relationship you have with family, friends and acquaintances. Attitudes held towards money and spending habits are influenced by one’s childhood and experiences. The psychology of money lets you understand behavioural patterns formed due to finances. Once you have a better idea of that, it becomes easier to put in the effort of striking a balance between financial goals and living a fulfilling life.

5 Ways to Manage Your Personal Finances

Choosing the right methods of finance management contributes to the growth of your personal finances. Hence, it is crucial that you understand your options and go for the best. Here are some tips to consider to manage your finances efficiently:

1. Invest in the right places:

Today, there is a vast number of investment options. While it can be overwhelming, you need to know which ones are right for you. Some factors to consider while looking at investment options are the returns that you might expect from it and the risk factors associated with a certain investment. Keeping in mind your age, income and financial goals, opt for investment methods that would be fit. There has been a growing interest in investments in stocks lately. The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are two of many stock exchanges in India.

2. Spread your income into multiple assets:

While it might be a lot less work to focus all your funds on one big asset, it might not be ideal. Chances are that your finances might remain static. When you direct funds towards more channels, you also reduce the amount of money to which any risk is associated. Building a secure financial future depends on how you choose to divide your assets. Stocks, deposits, and insurance can be some channels to invest in.

3. Make a budget plan and track your spending:

Budgeting is an important part of managing finances. If you blindly spend money, you might find yourself in a pit. Budgeting, however, helps you come up with a plan. It lets you look at previous spending and observe money habits. You might consider looking at budget rules to start your journey. One such rule is the 50-30-20 rule, according to which, 50% of your income should be going towards your needs, 30% towards wants, and 20% towards savings.

4. Think again before opting for a loan:

Make sure that you have emergency funds available for any unpredictable spending needs that you might face. This lets you escape getting loans in unnecessary situations. Financial choices should be properly thought out, and opting for quick loans might in fact leave you in a puddle. If it is necessary for you to take a loan, consider the interest percentage and plan out how you will be paying back for the loan.

5. Plan for your retirement:

It might seem far right now, but it’s never too early for you to start thinking about your life after retirement. It is a point of life where you will need security. Your present self is responsible for building that. Aside from savings, look into retirement plans or pension schemes that might help you in the future. With the increasing importance of financial management, many courses on it have emerged online. Colleges have also started to host skill enhancement courses, which often include the topic of financial management. Educate yourself constantly to keep up in this race of financial management.

Read More: Teaching Financial Literacy for Better Mental Health

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