Decoding financial behaviour: The psychology of money management
During a recent webinar, I asked a question that made people stop and think: "When you think about taking care of yourself, do you also consider your financial health?" It surprised many to realize just how much money can affect our mental well-being. While we all know money is important, not everyone connects it directly to how they feel. Financial Behavior is the behaviour in which an Individual manages their money and makes financial decisions. This behavior is subjective because it is predominantly based on the individual’s relationship with money, their upbringing, socio-economic class, and their value systems. Your financial behaviour depends a lot on the way you feel. Your emotions are closely linked with your financial decisions. They share a relationship closer than you would think. Therefore it is helpful to explore the relationship you share with money because it helps you explore other areas surrounding it as well.
This article throws light on some of the most common beliefs that influence our decision-making and the way we perceive money in our lives.
Instant gratification effect:
It is easy to get caught up in the era of instant gratification where there are multiple opportunities to grant instant results and overlook a future disadvantage or loss. When something benefits you now, it demands your attention to focus on the ‘now’ and only ‘now’ without accounting for how it would impact the rest of the financial planning. Instant gratification makes you believe that making a certain purchase will make your life easier and more convenient. More often than not, the truth is the more hurried financial decisions you make, the less practical they are likely to be.
Letting technology take the call for you:
You are only human for wanting to buy upgraded devices, new clothes, and trending housewares. There is nothing wrong with that. But have you ever thought about who is making that choice for you? Is it you or a social media-based algorithm that keeps showing you links or videos to these products? When you keep coming across these clickbaits often, they create a sense of curiosity and eventually succeed in creating a ‘need’ for that product. Social media can create unnecessary wants and present themselves as ‘needs’ in disguise. You have to be very careful with your money online especially because you can also buy products now even when you do not have money with an option of EMI.
Emotional reasoning:
Emotional reasoning stands as one of the most prevalent human errors. It occurs when decisions are solely guided by emotional responses rather than rational analysis when confronting a problem. For instance, consider applying for a bank loan and falling ill on the day of the appointment. Concluding that the loan won't be approved due to this "bad sign" is a prime example of emotional reasoning. Such cognitive errors often divert attention away from practical considerations, compelling individuals to prioritise emotional aspects, regardless of their impracticality.
That is why when it comes to finances, you should never make a decision when you are emotionally charged. Making decisions when you are emotional, whether it is excitement or anger clouds your practical judgment and can result in a polarized reaction.
Herd mentality:
Peer pressure is one of the ways through which herd mentality shows its effect while making decisions. The need for belongingness and the need to be accepted by others in the group are very common and basic human needs. Whenever you are a part of any group, you tend to feel pressurized to do certain things to conform to the group. You do not wish to face the Fear Of Missing Out and thus you end up spending money on doing things that most people do. A very common example is spending money on buying things that are trending in the market because of the way it makes you feel in the group.
FAQs:
How do I stop myself from being spontaneous with money?
The answer is quite simple because it lies in the question itself. When you feel tempted to spend money spontaneously, take a 5-minute break. You can either sit with a pen paper or take a walk. In these 5 minutes, think about whether that spending is coming from a place of need, emotion, luxury, or boredom. This will help you decide whether you truly need to purchase right now.
“I don’t trust others with my money. What do I do?”
Take charge! Educate yourself with different resources like online videos, podcasts, or by talking to professionals. When it comes to making financial decisions, analyze the gap between your current financial status and where you would like to be in the future and make decisions wisely.
Can I make decisions based on my emotions?
Yes and No. Yes, you can take decisions taking into account your emotions and financial decisions cannot simply be based on emotions. Our emotions are like waves of the ocean. They’re fleeting and dynamic. They evolve with time and experience. So it is always wise to also be more practical than emotional when it comes to financial decisions, especially with big investments.
