Our financial psychology determines how we deal with money. It’s important to understand this about ourselves because it will provide greater insights into why we handle our money as we do. People tend to make more financial mistakes as a result of their feelings about money than they do because of the financial realities involved.
Essentially, we all fall into one of 2 basic financial psychologies. We may be mild or extreme cases, but we all tend to fit in one of the following categories. They are:
Believing that we have or will always get whatever we need to live a good life and to support our families and ourselves. Those who have an attitude of abundance feel that the world is filled with opportunities and possibilities.
I have clients who have little money and don’t seem concerned. They never complain about finances, live comfortable lives, take frequent vacations and are generous. They seem to feel that everything will be fine and that somehow they’ll get whatever they need.
Attitude of lack
Believing that you may not have or be able to get whatever you need. I also have clients who are millionaires and have an attitude of lack. They’re always concerned that they won’t have enough.
Many of them are tightwads, compulsive savers who are always worried that they may lose what they have. Most of these people grew up in difficult financial conditions that left a lasting impression they can’t shake.
The way we relate to money has more to do with our attitude about life in general than how much money we have. Our feelings of abundance or lack do not correlate to how much we actually have, but our financial state of mind.
So what are the symptoms of each financial psychology?
Those in the abundance camp tend to invest rather than save. They are not always looking for guaranteed or safe investments and are more prone to taking risks. They feel that if they lose money, they can always make it back. People with an attitude of abundance usually live better lifestyles and fuller lives. They are not averse to spending their money to buy the good things life has to offer and don’t waste much time worrying about the stock market, their mortgages and money in general.
Conversely, people with an attitude of lack are always worried that they won’t have enough. Deep down, they’re afraid that they might have to struggle so they sock money away to make it through those difficult times. People with an attitude of lack tend to be savers rather than investors. They would be devastated if they lost any money since they only have a finite amount. They like to stockpile their money and avoid risk, so they put their money in the lowest yielding, but safest vehicles.
The groundwork for our attitudes toward money is laid in childhood. We are strongly influenced by our parents’ attitudes and their fears, as well as our family’s financial status. “Depression Era” children, whose parents struggled to put food on the table, naturally have different attitudes toward money than children who grew up in affluent environments.
Many of us have also been influenced by how we saw our friends, family, and neighbors deal with money. We wanted what they had and wanted to live like they did, so we adopted their attitudes and tried to copy their behavior. They became our role models.
Unfortunately, many people sabotage their financial futures. Spendaholics, who get a rush from spending money, feel better when they do so. In some extreme cases, the only time certain people feel good is when they’re spending.
Our psychology affects how we invest. Some of us are high rollers (always willing to shoot for the moon in the hopes of making a big score), while people at the other end of the spectrum are the squirrels (frightened investors so afraid to lose money they own the most conservative investments that bear the smallest returns).
Which are you? Here are some of the most common profiles. See where you fit.
Thinks that everything in life is a gamble. Wants big returns in a short period of time. Uses high-risk investment strategies and is always looking to hit the jackpot.
Usually, incurs big losses since his or her investments lack good diversification and asset allocation. Gets bored with conservative, long-term investments and tends to speculate in individual stocks, commodities and real estate.
Has little or no interest in managing money. Frequently, women who know nothing about investments, but also includes men. Prefer to have someone else handle their money and will usually do what their financial advisors suggest.
Trusting and often surprised when they lose money. They are frequently taken advantage of by unscrupulous characters.
The Credit Junkie
Addicted to acquiring things rather than to building their wealth. They are usually in denial regarding their addictive spending. Tend to carry big credit card balances, drive nice cars purchased with large loans.
Since much of their income goes toward debt payments, they have little savings or net worth. They wonder why it’s so hard to get ahead while they sabotage themselves through needless, compulsive spending.
The Money Master
Like the fitness freak who spends all his or her time in the gym, the Money Master is obsessed with money management. Is well educated in all money-related matters, tends to avoid others’ advice and takes full control of his or her investments.
Employs risk controls, but isn’t fearful of investing money in a diversified investment portfolio. Reaches financial goals, but also enjoys his or her money success by living an abundant and balanced life.
Savers who are as conservative as they come. They don’t overspend and they live frugally. Squirrels operate with an attitude of lack because they fear they will never have enough money.
Usually most or all of their money is in banks and treasury bills. Willing only to get low returns because they find the stock market way to risky and are deathly afraid of losses. Since they get such low returns, they have trouble keeping pace with inflation.
The way we relate to money is a learned behavior that is hard to change. And when it comes to money, people tend to go to extremes. Some spend their working years saving for retirement, but when they retire, they won’t spend any of it — even the interest generated by their savings and investments. Others spend freely and then have nothing left.