There are countless resources online that give advice on how to budget, how to get out of debt, how to save, how to invest, and so many more topics on money and finances. The interesting question, then, is why is money still such a difficult issue for people? Why don’t we all feel financially confident and successful, all the time?
At first glance, money and wellbeing (one’s state of overall health, across all components of life) may not seem to go together. However, there are numerous psychological components associated with people and their financial wellbeing. The broad categories include brain chemistry, the behavioral economics of loss aversion, family views of money and what it means, and personal beliefs regarding money, its meaning and how to manage it. There are also many others that will not be addressed in this blog.
The neurochemical elements related to money have to do with brain changes related to spending money versus saving money. It is well documented that when people act on urges for immediate gratification (i.e., I need those shoes NOW!), they activate specific chemical “pleasure centers” in the brain, which can cause them to have stronger, more frequent urges to repeat the gratifying behavior. Some people have a more difficult time delaying gratification than others. This experience alone accounts for significant differences in people who are able to save: they are able to study instead of play, achieve higher levels in education and subsequently higher levels of income, which can be tied to money wellbeing later in life. People who routinely act on spending impulses often run up debt, have cash flow problems and subsequent stress related to these situations. Other neurochemistry-related conditions that negatively affect financial wellbeing include addiction (to food, drugs, alcohol, sex, gambling, etc.), which often includes diverting money to support those immediate gratification demands of addiction with corresponding money problems.
The area of behavioral economics includes a significant body of research related to factors of influence and people’s decisions about money and subsequent financial wellbeing. For example, most people would rather not lose money than take the risk of getting more money. This was played out again in the last recession, when people pulled their money out of a market that was dropping in prices, bonds paid virtually nothing. Yet people who had cash and were risk-aversive did not reinvest ended up missing out on 70-200% returns in stocks over the next few years. Those who thought bonds were safe ended up losing money against inflation, even as low as it was during that time. This clearly had an impact on financial wellbeing.
Family views about money are passed on in the form of modeling, messages and social influence. For example, a family that views money as a typically scarce resource that should be shared equally will expect family members who do succeed in attaining higher levels of financial wellbeing to subsidize them. This can create family stress if the individual who has the money disagrees with the others’ beliefs about it. There is case after case of lottery winners suddenly being contacted by family members they had not heard from in a while asking for money. There are also a number of lottery winners who went bankrupt. Some of the reasons for this can be traced to family views about money, a feeling or belief that they did not deserve it, not knowing how to manage it, and an inability to tolerate the social isolation of being in a different economic stratum than their extended family, among other elements.
Individual beliefs about money play an important role in financial wellbeing. How people think about money plays out in their everyday decisions. If one cannot see their “future self” clearly, they may have difficulty saving or participating in their employer’s 401K. Those who do have a clear view of their future self generally find it easier to save and invest systematically. Some people have “all or none” beliefs about money. If they have it, they spend all of it. If they were going to save, and spent it instead, then they say they will start tomorrow. Unfortunately, tomorrow never comes because they repeat the same sequence the next time. This is in contrast to people who view money with more complexity, who are able to allocate money to budget categories, and value the practice of paying themselves first (saving) versus spending.
What can you do to build your awareness of the psychological aspects of financial wellbeing, and make them work in your favor?
- Spend time becoming aware of your thoughts and beliefs about money. Where did you learn them? How do they serve you? How do they positively or negatively impact your financial wellbeing?
- If your neurochemistry is part of your financial wellbeing in a negative way (addictions, impulse control) consider seeking professional help.
- Identify your family patterns related to money. How do they enhance or detract from your financial wellbeing? How do you feel about what you learned or did not learn from your family related to money?
- Become aware of external factors related to behavioral economics that lead to risk-aversive versus “irrationally exuberant” decisions.
To Your Wellbeing,
Mines, R.A., Stone, W.C., DeKeyser, H.E.