Understanding the psychology of money: A path to financial wellness

In today's financial landscape, achieving financial wellness isn't just about numbers; it's also about understanding the psychological factors that influence your relationship with money. This matters more than you may imagine. After all, the financial decisions you make are strongly influenced by your beliefs and attitudes toward money. In this article, the Wealth Enhancement looks at the psychology of money to explore how your thinking may be impacting your financial wellness.

The Psychology of Money

Money is more than a medium of exchange. It's also a reflection of your deepest desires, fears, and aspirations. Your behaviors surrounding money are often shaped by a range of psychological factors, including upbringing, past experiences, and social influences. By dissecting these behaviors, you can gain valuable insight into your financial decision-making processes.

Consider, for instance, the role that emotions play in your financial decisions. Fear of scarcity may lead to excessive risk aversion, while greed or so-called "irrational exuberance" could tempt you to take unnecessary risks or accrue too much debt.

Beliefs around money may also influence your behaviors. For example, someone who considers money "the root of all evil" will make different financial choices than someone who associates financial wellbeing with success. Bringing these unconscious influences into the light can help you make more informed—and potentially healthier—financial choices.

The Impact of Financial Stress

Getting to the root of these belief systems can deliver more than bottom line benefits. It can also help improve your overall well-being. That's because there's a link between financial stress  and negative health outcomes. In fact, 42% of U.S. adults say money worries negatively impact their mental health, which in turn can lead to impulse spending and poor financial planning. This type of stress can also result in physical symptoms ranging from headaches and stomach issues to trouble sleeping.

People experiencing financial stress may also be more susceptible to marketing tactics that aim to induce psychological responses that encourage emotional spending. While most people engage in emotional spending occasionally, left unchecked, this habit can take a long-term financial toll.

What is Financial Wellness?

One way to reduce financial stress is by prioritizing your own financial wellness. In addition to growing your wealth, financial wellness involves cultivating a state of financial stability, security, and satisfaction. For many, this means striking a balance between managing day-to-day finances and planning for the future. This involves mastering the art of financial management while fostering a healthy relationship with money that empowers you to live on your own terms.

Notably, financial wellness isn't about overcoming a negative financial psychology. Even people with healthy attitudes toward money can benefit from a deeper understanding of the motivations that underlie their financial decisions. This can help you spend, save, and invest more consciously.

How to Improve Your Financial Well-being

Once you begin gaining greater clarity into your financial psychology, you can pinpoint various opportunities for improvement. Although there is no one-size-fits-all approach to financial wellness, here are some tips to get started:

Pay Attention to Your Thoughts

If you hold some limiting beliefs around money, it can be helpful to examine them more carefully.

• Are your financial fears legitimate or simply the product of insecurity or uncertainty?
• Are your financial decisions well-informed or driven by emotion or a desire to be perceived in a certain way?
• Are you putting off investing because your finances are limited or because you lack financial confidence?

By bringing your habits to the forefront and questioning them without judgment, you can more accurately assess if your beliefs are true or if you're acting based on outdated or unexamined assumptions.

Identify Your Financial Strengths and Weaknesses

Beyond examining your mindset, look at your day-to-day financial habits to identify strengths and weaknesses. For instance, perhaps you set a budget for your monthly or annual spending, but you're not following it regularly. Perhaps you think you're spending carefully, but you haven't tracked your expenses, so you aren't sure. Or maybe you recognize the importance of putting aside money regularly but don't know whether you should be prioritizing your emergency savings, your debt payments, your investments, or something else.

When it comes to managing your day-to-day finances, it's important to have insight into these habits. That way, you'll be more likely to achieve your short-term financial goals.

Think Long Term

Another critical factor for achieving financial wellness involves the creation of a financial plan that can help you reach your long-term objectives as well. This can mean saving for your children's education, planning for retirement, protecting your family with insurance, setting up an estate plan, or any other future goal.  

Build Healthy Habits

Beyond budgeting, saving consistently, and creating a financial plan, there are a range of actions you can take to enhance your financial stability. Depending on your personal circumstances, these may include:

• Regularly reflecting on your financial goals, particularly as they change over time
• Bolstering your financial literacy
• Practicing mindful spending by differentiating between financial wants and needs
• Managing debt responsibly by paying off high-interest balances
• Using insurance as part of your estate and tax planning
• Talking about money with informed friends and/or financial professionals

One of the best ways to get started is by working with a financial advisor. Beyond helping you consider your different investment options and tailoring your portfolio to your risk tolerance, an experienced advisor can work with you to create a budget, plan for your future financial needs, and enhance your financial literacy so you can better explore your beliefs around money.