10 Human Psychology Reasons Why You're Losing Money
If you listen to financial advisors, money management comes down to one simple thing: Strategic budgeting. Indeed, managing your finances is all about budgeting your savings, your expenses, your income, and your investments. Once you gain an overview of where everything belongs, it should be easy to follow the plan, right?
Wrong. It doesn't matter how effective your strategy seems on paper. According to Sarah Newcomb, Ph. D., behavioral economist, we need to make financial management a human-focused science. Countless financial advisors agree that they always have some clients who would be financially sound if they were not driven by emotional matters. When it comes to making financial decisions, psychological factors will make a huge difference in the outcome you reach. You do yourself a disservice if you ignore how your emotional state affects your economic wellbeing. Therefore, it makes sense to dive into the heart of human psychology to identify the emotional triggers that affect your financial health. Here are the top 10 reasons why you can't stick to your money plans or why you create bad financial strategies.
#1. You put your faith in fake experts
We instinctively look for a figure of authority. As children, we turn to our parents for guidance. As adults, we look for experts in any form or shape. If you're the kind of person who doesn't question authority, you could follow a piece of advice that isn't suitable for your situation. Bad investing advice, for instance, is everywhere. You can find it on personal blogs as much as from apparently reputable sources. Lack of research is one of the most frequent reasons for bad advice. Unfortunately, if you put too much faith in a stranger's expertise, you're likely to take the information for granted. Too many amateur investors commit to dramatic expenses because of what an online expert said. Personalities that seek approval from an authority figure are more at risk of devastating losses caused by digital influencers.
#2. You are irrationally optimistic
Good things happen when you believe in yourself. Believing in yourself unlocks positive energy. There is no denying that a positive attitude will lead to happier outcomes. Most people believe that positivity creates a happy domino effect. This is true to a certain extend. An optimistic approach will increase your persistence, performance, and productivity. Will optimism land you your dream job? It can play a crucial part in impressing others. Will it make your dream home more affordable? Not at all. Signing a mortgage loan with no understanding of your debt to income ratio will likely backfire, regardless of how optimistic you are about it. Positive personalities can achieve more when they stay realistic about their goals and strategies. But blind optimism can have devastating consequences.
#3. You fall for peer pressure
It's in human nature to want to fit in. You instinctively pick habits that help build a social circle. Perhaps, at school, you started to play ball sports to make friends with other kids, even though you didn't care much about those games. We need to belong to a group. But often, efforts we make to create the sensation of belonging can affect our budget. Personalities who seek social recognition from peers are more likely to commit to purchases and expenses that meet the approval of their social group. How does peer pressure materialize itself in the real world? It could be through purchases that you don't need, but that will match what friends or co-workers have, such as the latest smartphone devices. Alternatively, if you are spending the evening with friends, you could find yourself paying for more drinks because it's hard to say no.
#4. You reward yourself
Life can be stressful. Whether you've had a tough day at work or you've just received bad news, reward spending can serve as a soothing hug for your mental health. We've all bought a cheeky donut to cheer ourselves up after a long day or order a smooth coffee to go before a long meeting. It's all about the little things and how they make us feel. Unfortunately, while small, repeated purchases can be emotionally meaningful, they rarely feature in your budget planning. Reward expenses can put your budget back by several thousand dollars at the end of the year. You will find different personality types that respond to reward spending. Impulsive shoppers have an obsessional and addictive relationship with soothing purchases. They often require targeted behavioral therapy to gradually replace the budget-unfriendly habit. For those who rely on rewards only as an occasional coping mechanism, it's easier to recognize triggers and take back control. In the long term, psychologists and financial advisors agree that a small reward budget can be the easiest solution to make positive rewards more manageable.
#5. You follow trends
Trends are unavoidable. When the market sees something it wants, it is everywhere. The problem with trends is that they can take over niche markets, convincing shoppers that nothing else matters. Some trends last, but they often disappear quickly. As a result, all the seemingly indispensable items you've bought become irrelevant. For example, according to studies run during the pandemic, the average American working from home spent more money at home than in the office. Work from home outfits and co-ord items have been hugely popular at the start of the pandemic. For many professionals, they became the obligatory home office dress code. Lifestyle, fashion magazines, and general media were quick to promote cozy loungewear that would elevate the mood at home. Home office decor also became a trend, encouraging households to start DIY projects. From new furniture to dramatic paint colors, the average home office setup costs $572. The cost doesn't include new outfits or decorative and inspirational elements. This begs an important question as employees are heading back to the office: What happens to the WFH purchases?
#6. You're stressed out
Stress affects your ability to make decisions. When you are going through a lot of pressure, stress transforms your perceptions of the situation. When you are stressed out, you tend to rush toward a quick answer in the hope of alleviating your situation. As a result, you are at risk of focusing on how fast you can change things instead of considering how effective your chosen solution will be. High stress is typically linked with poor financial choices, such as payday loans or maxing up your credit card spending. Unfortunately, while the decision can provide a fast result, it also comes with long-lasting consequences. Payday loans or credit card debts, for example, will dramatically affect your finances in the long term. Short-term loans have a high interest rate, which means they can lead to unmanageable debt repayment terms.
#7. You're trying to impress others
Do purchases define who we are? Your car, outfit, home, and preferred tech are some of the elements that can showcase your status. Depending on your situation, you may choose to purchase premium items that will influence the perception that others have of you. Suppose you are trying to launch your first business. You want to pitch your ideas in front of investors. You also want to make a positive impression. Therefore, you plan to purchase a quality suit, a brand new smartwatch, and a new laptop. Everybody understands the importance of appearance defining a positive impression. However, when purchases are ruled by impressions rather than practicality, it can damage your budget.
#8. You don't feed your brain
Your diet influences your mood and your ability to process information. A high-fat, high sugar diet, for instance, increases stress levels, creates mood swings, and makes you more vulnerable to poor emotionally driven decisions. On the other hand, a balanced diet that supports cognitive functions will help control financially risky behaviors.
#9. You are depressed
According to a study run by the MMHPI (Money and Mental Health Policy Institute), depression can be both a cause and a consequence of financial issues. Indeed, depression can be debilitating in everyday life. People who suffer from depressive episodes find it difficult to manage simple financial tasks such as budgeting. Depression affects your ability to focus, make decisions, plan for the future, and engage. When you are depressed, the idea of planning long-term financial goals is absurd. You are not in an emotional state to consider requirements for the future. As a result, you could be more likely to overspend and go into debt.
#10. You're your parents' child
You grow up surrounded by role models. Children of parents who made poor financial choices are more at risk of perpetuating the same mistakes as adults. Unfortunately, when you only know one possible response or attitude towards your finances, it can be tough to escape the vicious cycle. Educating yourself and seeking financially safe role models can help you break free from reproducing your parents' situation.
Additionally, individuals in dysfunctional families are also more likely to make decisions based on their relationship with their parents, aka either as a way to please or to reject the authority figure. These financial decisions are unlikely to be well thought-through.
In conclusion, every financial choice has a trigger. We are emotional creatures, and therefore, we react to our psychological environments. Stress, peer pressure, and parental authority can greatly affect the way you manage your money. The bottom line: What if your therapist held the key to your wealth?