The psychology behind why you’re broke and how to fix it | INVESTEDMOM
Do you ever find yourself wondering, "Why am I broke?" You're not alone. I’ve been there. Financial struggles and debt are common issues that many people face. According to a 2021 survey by Bankrate, 58% of Americans have less than $1,000 in savings. And a 2021 study by LendEDU found that 21% of Americans believe that they will never be able to pay off their student loans. Yikes!
But have you ever stopped to consider the psychology behind your financial behavior?
Money is more than just a means of exchange. It's tied to our emotions, our sense of identity, and our values. Our beliefs about money are shaped by our experiences, upbringing, and social conditioning. And these beliefs, in turn, influence our financial decisions and behaviors.
So if you're constantly finding yourself in a state of financial struggle, it's important to understand the psychological factors that are driving your behavior. By understanding the psychology of money, you can begin to make positive changes and break the cycle of financial hardship.
I'll explore the psychology behind why you're broke and offer practical tips for how to fix it. From understanding the cognitive biases that influence our spending habits to break the cycle of social comparison and the pressure to keep up with others, I'll help you develop a better understanding of your financial behavior and provide resources for getting help with debt and financial planning. So if you're ready to take control of your finances and build a better future, keep reading!
The Psychology of Money
Money is a powerful force that can shape our behavior in ways we might not even realize it. Our relationship with money is complex and multifaceted, and it's influenced by a variety of psychological factors. Let's take a closer look at some of the ways that psychology impacts our financial behavior.
"The field of behavioral finance has shown us that our decision-making is often far from rational when it comes to money." - Christine Benz, Morningstar
One of the most significant factors is a cognitive bias. We all have biases or mental shortcuts, that help us make decisions quickly and efficiently. These biases can also lead us astray when it comes to money.
For example, the "anchoring effect" can make us rely too heavily on the first piece of information we receive, even if it's not accurate. This can lead us to overspend on a purchase that's initially priced too high.
Similarly, the "availability heuristic" can cause us to overestimate the likelihood of rare or dramatic events, such as winning the lottery or getting a big promotion. This can lead us to make financial decisions based on unrealistic expectations, such as taking on more debt than we can realistically pay back.
"Being able to make good financial decisions is critical to overall well-being and quality of life." - Annamaria Lusardi, George
Our emotions also play a significant role in our financial behavior. When we're stressed, anxious, or depressed, we're more likely to make impulsive decisions or overspend to alleviate our negative emotions. Similarly, when we're feeling good, we may be more likely to make rash decisions or indulge in expensive treats.
But perhaps the most significant psychological factor in our financial behavior is our sense of identity. Our beliefs about money are often closely tied to our sense of self-worth, and we may use the money to signal our values and priorities to others. For example, someone who values social status may overspend on luxury items to signal their wealth and success to others.
Overall, understanding the psychology of money is essential to making positive changes to our financial behavior. By recognizing our cognitive biases, managing our emotions, and reflecting on our values and priorities, we can begin to make better financial decisions and build a more secure financial future.
Case Study:
John is a successful business owner who has worked hard to build his company from the ground up. He's always been a savvy investor, but he recently suffered a significant loss on one of his investments, leaving him feeling anxious and unsure about his financial future.
John reads an article on the psychology of financial behavior and realizes that his loss aversion bias has been influencing his investment decisions. This bias refers to the tendency to prefer avoiding losses to acquiring gains, even if the potential gains outweigh the potential losses.
With this new insight, John decides to seek out the advice of a financial advisor to help him navigate his investments and make more rational financial decisions. The advisor helps him develop a comprehensive financial plan that aligns with his long-term goals, while also mitigating the risk of further losses.
John also takes steps to manage his emotions around investing, such as creating a plan for dealing with market volatility and seeking out support from his friends and family. With these strategies in place, John is able to take control of his financial behavior and build a more secure financial future for himself and his family.
Actionable Steps:
Recognize your cognitive biases by identifying your tendencies in financial decision-making. For instance, write down the last few purchases you've made and reflect on whether cognitive biases influenced those choices.
Seek to be more mindful in your spending by developing a habit of taking a moment to pause before making a purchase. Ask yourself why you want to buy the item and whether you truly need it.
Be aware of your emotions and how they impact your spending habits. Develop strategies to cope with negative emotions in ways that don't involve spending money, such as exercise or meditation.
The Roots of Financial Problems
Now that we've explored some of the psychological factors that influence our financial behavior, let's take a closer look at the root causes of financial problems. There are many different factors that can contribute to financial struggles, and understanding these factors is an important step in breaking the cycle of financial hardship.
”The first step in taking control of your finances is to understand the psychological factors that influence your financial behavior." - Financial Planning Association
One significant factor is childhood experiences. Our upbringing and family environment can have a profound impact on our beliefs about money and our financial behavior. For example, if we grew up in a household where money was scarce and resources were limited, we may develop a scarcity mindset that causes us to hoard money or make overly cautious financial decisions. On the other hand, if we grew up in a household where money was plentiful and resources were abundant, we may develop a mindset of abundance that causes us to overspend and take on too much debt.
Another factor is social conditioning. Our culture and society send powerful messages about the importance of material wealth and social status, and these messages can influence our financial behavior. For example, if we're constantly bombarded with advertisements that suggest we need the latest gadgets, fashion, or cars to be happy and successful, we may feel pressure to spend money on these items, even if we can't afford them.
Social comparison is also a significant factor in our financial behavior. We often compare ourselves to others and feel pressure to keep up with our peers in terms of material possessions and social status. This can lead us to overspend, take on too much debt, and make financial decisions that are not in our best interest.
Overall, understanding the root causes of financial problems is essential to breaking the cycle of financial hardship. By reflecting on our upbringing, culture, and social conditioning, we can begin to recognize the beliefs and behaviors that may be holding us back and make positive changes to our financial habits.
Case Study:
Sara is a recent college graduate who is struggling with student loan debt. She has a good job, but the high cost of living in her city, coupled with her loan payments, is causing her significant financial stress.
Sara reads an article on the psychology behind financial behavior and realizes that her present bias has been impacting her financial decision-making. This bias refers to the tendency to prioritize short-term gratification over long-term goals.
With this new insight, Sara decides to seek out resources to help her manage her debt and make more informed financial decisions. She starts by creating a budget, tracking her expenses, and identifying areas where she can cut back on unnecessary spending.
Sara also seeks out a debt management program, which helps her develop a repayment plan and negotiate lower interest rates on her loans. With a plan in place, Sara is able to stay focused on her long-term financial goals, rather than becoming overwhelmed by her current financial stress.
By being mindful of her spending habits and seeking out support from resources like a debt management program, Sara is able to take control of her financial behavior and build a more secure financial future for herself.
Actionable steps:
Reflect on your childhood experiences and how they may have influenced your beliefs and behaviors around money. Identify any negative patterns that may be holding you back.
Question the societal messages you receive about the importance of material wealth and social status. Take a step back and reflect on what truly matters to you.
Be mindful of social comparison and avoid the temptation to keep up with others. Consider the true cost of purchases and whether they align with your values and priorities.
Breaking the Cycle
Now that we've explored the psychology behind why you're broke and the root causes of financial problems, let's talk about how to break the cycle of financial hardship. The good news is that there are practical steps you can take to improve your financial behavior and build a more secure financial future.
According to a 2020 survey by the National Foundation for Credit Counseling, only 29% of Americans have a written budget.
First and foremost, it's essential to create a budget, even if it’s just 1 time to get a snapshot of your finances. A budget helps you track your expenses, set financial goals, and avoid overspending. Be sure to include all your income and expenses, including fixed costs like rent, utilities, and debt payments, as well as variable costs like groceries, entertainment, and discretionary spending.
It's also important to be mindful and self-aware when it comes to your financial behavior. Practice pausing before making a purchase and asking yourself if it's something you really need or if you're buying it to fill an emotional void. Similarly, be aware of the social comparison trap and resist the urge to keep up with others in terms of material possessions and social status.
A 2018 study by the National Bureau of Economic Research found that people who receive financial advice are more likely to save money and less likely to carry credit card debt.
If you're struggling with debt, consider seeking help from a financial advisor, credit counselor, or debt management program. These resources can help you develop a plan for paying off debt, negotiate with creditors, and improve your credit score.
Finally, be sure to prioritize your financial goals and values. What's most important to you? Is it paying off debt, saving for a down payment on a home, or building an emergency fund? By aligning your financial behavior with your values, you'll be more motivated to stick to your budget and make positive changes to your financial habits.
Breaking the cycle of financial hardship takes time, effort, and self-awareness. By following these practical tips and seeking help when needed, you can build a more secure financial future and turn the question, "Why am I broke?" into “I live an unrestricted life”.
Actionable Steps:
Create a budget. Start by tracking your income and expenses, and adjust your spending habits as needed to ensure that you're living within your means.
Seek out resources such as financial advisors or credit counselors to help you develop a plan for paying off debt or managing your finances more effectively.
Prioritize your financial goals and values, and ensure that your spending habits align with these priorities.
My favorite recommendations: 5 Books that will help you master your money, with your mind:
"The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money" by Carl Richards: This book offers practical advice on how to overcome cognitive biases and make better financial decisions.
"The Art of Money: A Life-Changing Guide to Financial Happiness" by Bari Tessler: This book helps readers identify their emotional relationship with money and offers a holistic approach to financial planning.
"Nudge: Improving Decisions About Health, Wealth, and Happiness" by Richard Thaler and Cass Sunstein: This book explores the concept of "choice architecture" and how small changes in the way choices are presented can have a big impact on financial behavior.
"Money Master the Game: 7 Simple Steps to Financial Freedom" by Tony Robbins: This book offers a step-by-step plan for achieving financial freedom and creating a life of abundance.
"Atomic Habits: An Easy & Proven Way to Build Good Habits & Break Bad Ones" by James Clear: This book is not specifically about finance, but it provides practical advice for changing habits and behavior, which can be applied to financial behavior as well.
Other relevant tools and resources include:
Personal finance apps such as PocketGuard, Personal Capital, and EveryDollar, can help you track your expenses, manage your budget, and plan for your financial goals.
Online financial education courses, such as Increase your Income, and those offered by Coursera, edX, and Khan Academy, provide free or low-cost education on a range of financial topics.
Financial planning software, such as Quicken, QuickBooks, and TurboTax, which can help you manage your finances more effectively and plan for tax season.
Credit scores monitoring services, such as Credit Karma, Experian, and TransUnion, which provide free credit reports and scores, as well as tools for improving your credit.
Online financial forums, such as The Wealth Builders Academy Membership, Bogleheads, and The Money Mustache Community, provide a space for discussing personal finance topics and getting advice from others who are also working to improve their financial behavior.
Mastering Your Money: Here’s a FAQ for Understanding the Psychology Behind Your Financial Behavior:
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A: The psychology of financial behavior refers to the cognitive biases, emotions, and social conditioning that influence our financial decision-making.
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A: Cognitive biases can cause us to make irrational or illogical financial decisions, such as overspending or being overly risk-averse in investments.
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A: By being mindful of our thought processes and recognizing when we may be succumbing to these biases, we can make more rational financial decisions. Creating a budget, setting clear financial goals, and seeking the advice of a financial advisor can also help.
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A: Emotions such as fear, anxiety, and greed can influence the way we manage our money, leading to impulsive decisions or missed opportunities.
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A: By being aware of our emotional triggers and seeking out strategies for managing these emotions, such as creating a plan for dealing with market volatility or seeking out social support.
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A: Social conditioning, including the beliefs and values we learn from our families, friends, and culture, can influence everything from our spending habits to our attitudes toward debt and investing.
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A: By reflecting on our own beliefs and values around money and taking steps to build a financial plan that aligns with these values. Seeking the support of a financial advisor or joining a community of like-minded individuals can also provide helpful guidance and encouragement.
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A: Creating a budget, being mindful of our spending, seeking out resources, working with a financial advisor, and managing our debt are all practical strategies for taking control of our financial behavior and achieving our financial goals.
Let’s Wrap
The psychology of money plays a significant role in our financial behavior, and understanding the root causes of financial problems is essential to breaking the cycle of financial hardship. By recognizing the impact of cognitive bias, emotions, and social conditioning, we can begin to make positive changes to our financial habits and build a more secure financial future.
If you're struggling with financial hardship, remember that you're not alone. There are many resources available to help you, including financial advisors, credit counselors, and debt management programs. By seeking help and being willing to make positive changes to your financial behavior, you can break the cycle of financial hardship and achieve your financial goals.
So if you're ready to take control of your finances and build a better future, start by reflecting on your beliefs about money, creating a budget, and prioritizing your financial goals and values. With time and effort, you can answer the question, "Why am I broke?" with confidence and clarity, and build a brighter financial future for yourself and your loved ones.
Join the Wealth Builders Academy Membership and get access to a community of people on the same journey, learning how to become financially free and live an unrestricted life!
Stay Invested xx
Meet the Author:
Inge was born and raised in Cape Town, South Africa, and moved to Canada in 2010 looking for a better life. She always had an entrepreneurial spirit and started her first side hustle when she was 9 years old – selling fudge at school during lunch breaks.
It wasn’t until much later that she realized that saving isn’t enough to get ahead. She was always very interested in real estate, but saving up for a down payment was grueling and slow, and the demands of life kept getting in the way.
She started investing in herself and upgrading her skills while learning how to invest. She quickly became debt free and compounded her money at a staggering rate.
It wasn’t until she became a coach that she realized how significant an impact she can make in people’s lives by sharing her journey, learnings, and processes.
So here she is, advocating for everyone who is invested and wants to build their wealth, especially the mommas!