Menu #25: Understanding the psychology of money

STATS STACK 🥞

$387,600 is the new median U.S. home sale price, a record high according to Redfin, despite 30-year mortgage rates hovering around 7%. This slight drop from the 7.7% peak in October 2023 hasn't made homes more affordable. Limited supply due to higher interest rates is driving prices up, as homeowners are reluctant to sell and trade a low-rate mortgage for a much higher one (Source: CSHPIN).

53% of household food budget is now spent on food away from home, up from 41% in 1997. Restaurants are set to haul in a total of $1.1 trillion this year, the highest figure on record. These reports underscore that dining out is becoming increasingly popular, driving growth in the restaurant sector and making it a hot corner of the retail real estate market (Source: USDA).

72% of Americans report feeling stressed about money at least occasionally. People often link money with security, power, or freedom, leading to behaviors like impulsive spending or hoarding. Recognizing the emotional aspect of money is vital in making balanced financial decisions (Source: APA).

DEEP DISH 🍕

Understanding the Psychology of Money

Today, let’s dive into a fascinating topic that goes beyond numbers and spreadsheets: the psychology of money. Our emotions and mindset play a huge role in how we manage our finances. Understanding this can help us make better financial decisions and lead a more fulfilling life. Let's explore how our emotions influence our financial choices and what we can do to stay on the right track.

More Money, More Problems?

You might think that making more money will solve all your financial problems. But here’s the truth: if you can’t manage a $100,000 income, you probably won’t be able to manage a $500,000 income either. Money amplifies your habits, both good and bad.

Why More Money Isn’t Always the Solution:

Lifestyle Inflation: As income increases, people tend to spend more rather than save or invest. This can lead to living paycheck to paycheck, no matter how much you earn.

Poor Money Management: Without good financial habits, higher income can lead to bigger debt and more financial stress.

Tip: Focus on building strong money management skills at any income level. Create a budget, stick to it, and prioritize saving and investing. Good habits formed with a smaller income will serve you well as your income grows.

Know Yourself: What Truly Makes You Happy?

Understanding what genuinely brings you joy is crucial for financial well-being. It’s easy to fall into the trap of spending based on societal expectations or peer pressure. But aligning your spending with what makes you truly happy can lead to a more fulfilling life.

How to Align Spending with Joy:

Self-Reflection: Take time to reflect on what truly makes you happy. Is it traveling, spending time with family, or pursuing a hobby?

Mindful Spending: Once you know what brings you joy, direct your spending towards those areas. Avoid spending on things that don’t align with your values and happiness.

Tip: Keep a journal to track your spending and reflect on how each purchase makes you feel. This can help you identify patterns and make more intentional spending choices.

The Influence of Emotions on Financial Decisions

Our emotions heavily influence our financial decisions, often in ways we don’t realize. Fear, greed, and even boredom can lead to poor financial choices.

Common Emotional Traps:

Fear: Fear of missing out (FOMO) can lead to impulsive purchases or risky investments. Fear of loss can prevent you from taking necessary risks, like investing for the future.

Greed: The desire for more can lead to overleveraging and taking on too much debt.

Boredom: Sometimes, spending money becomes a way to cope with boredom or stress, leading to unnecessary purchases.

Tip: Recognize when your emotions are driving your financial decisions. Take a step back, breathe, and reassess your choices logically.

Building a Healthy Financial Mindset

Developing a healthy financial mindset involves understanding your relationship with money and working on positive financial behaviors.

Steps to a Healthier Financial Mindset:

Set Clear Goals: Having clear, achievable financial goals can provide direction and motivation. Whether it’s saving for a house, paying off debt, or building an emergency fund, goals give you something to work towards.

Educate Yourself: Knowledge is power. The more you understand about personal finance, the better equipped you’ll be to make smart decisions.

Celebrate Small Wins: Recognize and celebrate your financial milestones, no matter how small. This can keep you motivated and positive.

Final Thoughts

Money is more than just a tool for transactions; it’s deeply intertwined with our emotions and mindset. By understanding the psychology of money, we can make better financial decisions, reduce stress, and lead a more fulfilling life.

Remember, it’s not about how much money you make, but how you manage and spend it. Align your financial choices with what truly brings you joy, and don’t let emotions drive your decisions. With a healthy financial mindset, you can achieve your goals and enjoy the journey.

Until next time, stay mindful, stay positive, and keep making smart financial choices. You’ve got this!

SWEET LINKS 🍰
Digital bites we think you’ll like

Visual money map — Check out the visual summary of "The Psychology of Money" by Morgan Housel. The book dives into the idea that financial success is more about your behavior than how smart you are, emphasizing the impact of emotions and personal experiences. It also highlights the importance of luck, risk, and the power of compounding, and encourages a humble and frugal lifestyle.

Hiding in plain sight — Check out the third installment of this “Invisible Costs” series, where they dive into those sneaky expenses that catch us off guard. This time, they’re tackling homeownership and all the unexpected costs that come with it, from seasonal maintenance and mulch to appliance upkeep. Did you know the average homeowner spends over $3,000 a year on these surprises? Owning a home is a personal choice, but being aware of these hidden costs can help you manage your budget better.

Buyers’ remorse — Watch this video on how the surge in "buy now, pay later" (BNPL) loans, up 1100% from 2019 to 2021. This "phantom debt" is hard to track, with estimates suggesting a $50 billion market, indicating households might be more indebted than we think. Despite low reported default rates, BNPL users often use these loans for essentials and are financially vulnerable. While some say the default rate is low, surveys show many users struggle with repayments.