People's feelings about money are often a stronger influence on their spending and saving decisions than the actual amount of money they earn. Thus, a whole new field of study, called behavioral finance, has developed in recent years to research people's feelings about, and reactions to, money. This article will discuss factors that affect how people handle their money including a person's values, thoughts, and beliefs.
Values are beliefs about what is important that guide our lives. People generally spend money in a way that is consistent with their values. Values are also the building blocks of financial goals. A family that values education, for example, will probably make college savings a high priority. Another family that values their religion might decide to tithe a certain portion of its income. Examples of values are family togetherness, image and personal appearance, religion/faith, close friendships, job success, community service/helping others, and education/knowledge.
Another important factor affecting financial decisions is heuristics. Heuristics are "mental short cuts." In other words, rules of thumb that people use to simplify financial decisions. Unfortunately, not all heuristics are helpful when it comes to managing money. Some people make the mistake of extrapolating the past into the future and overemphasizing recent market trends (e.g., avoiding the stock market altogether because of its recent volatility).
People also use money in connection with a number of emotions. They include security, power and control, status and success, and to build self-esteem. They are also influenced by "money messages" in society (e.g., advertising). People get money messages from a variety of places. Sources of money messages include parents, religion, media, friends, and financial institutions.
"Money Baggage" is harmful thoughts and beliefs about money. They can hold people back from achieving financial success. Examples include "My net worth determines my self worth", "Live for today--the future doesn't matter," "It's just too complicated," and "The man should make all financial decisions."
Understanding your "money baggage" is the first step in making changes to improve your finances. To better understand your money baggage, reflect on what you've heard about money from society, your parents, your friends, and/or your spouse. Also, what do you say about money? What does money mean to you?
A number of books have been written about money personalities. This is another way of looking at factors that influence financial decisions. Money Harmony, by Olivia Mellan, classifies money personalities as: hoarder, spender, money monk, avoider, and amasser.
Another way to probe your money decisions, values, and financial goals is to ask yourself some hard questions. What is the meaning and purpose of your life? What would you do if you found out you had less than 10 years to live? How do you want to be remembered?
Many people take stock of their lives at some point, often in mid-life or after a "wake-up call" like cancer or a heart attack. Very often the things we like to do best cost little or nothing. This life assessment process includes weighing needs and wants and pausing to enjoy simple pleasures. As the old saying goes, the best things in life are often free.