We recently did a Money Gym masterclass session with Dr Sallyanne Decker from the University of Greenwich. In the session, we discussed money mindsets and looked into the link between how we think and how we use money. Here are some of the key takeaways from the webinar…
Understanding your mindset & personal money story
What do we mean by ‘mindset?’
When we say ‘mindset’, we are talking about the set of beliefs and attitudes that we, as individuals, have towards money. These beliefs and attitudes shape how we see ourselves and how we see the world – but we are not fully aware of them. It’s important to be aware of your money mindset because it affects how you think, feel and act.
A lot of our beliefs and attitudes about money are formed quite early in our childhood and passed on from generation to generation. Sometimes we are influenced by our cultures or religions, meaning some groups of people will have similar attitudes. But It’s common to have conflicting beliefs and outlooks on things.
Types of money mindsets
Researchers have come up with four ways to categorise money attitudes…
- Money Worship – People who believe that having more money is the key to happiness. More money would be the solution to ALL of their problems
- Money Status – People who believe that their self-worth equals their net worth. They may try to show this by trying to display their wealth outwardly
- Money Vigilance – People who are alert and aware of their financial circumstances. They value good financial health, think saving is important, and feel that people should work for their money
- Money Avoidance – People who avoid dealing with their financial situations. They think negatively about wealth and will find it difficult to budget
Discover your money script with the Klontz Quiz
Biases & how they affect our financial decisions
What is a financial bias?
Financial Biases are ways of thinking that affect our decision-making and increase the likelihood of poor financial outcomes like lower savings and credit scores…
- Biases limit our abilities to assess our needs and long-term interests
- They can make it hard for us to understand financial products and services
- They’re not determined by education, intelligence, skills or wealth
- They show we are human, and some biases are emotional
How are our finances affected by biases?
Present bias affects us when we have to choose between immediate and delayed outcomes. It can lead us to buy things we may not need on impulse rather than saving up for our goals.
Projection bias leads to misguided purchases. We feel that what we prefer now will be the same as what we will prefer in the future.
Framing bias occurs when we are evaluating a product. We react differently to the same situation because of how information is presented to us.
Persuasion and Social Influence
Being influenced by the popularity of a product without considering whether it is suitable for you
We often strongly prefer avoiding losses to acquiring gains because of hard-wired emotions (fear of losses). Someone might know it’s better for them to make a change, but they prefer to maintain the status quo because they feel the small benefits they may gain are not worth it. People are willing to pay extra for ‘peace of mind’ and be less willing to switch to avoid regret.
Improving your money mindset
If you’re unhappy with your money mindset or the way you view your finances, there are strategies you can use to help you get to where you want to be…
Practising ‘futuremindedness’ simply means imagining your future situations. By doing this, you’ll have the ability to be guided by imagining your future aspirations and goals.
Be as specific as possible about where you would ideally like to be and how you will get there. How much control you feel you have is a key factor that determines financial success.
Keep a log of the feelings and thoughts you associate with your behaviour or situation. Then come up with alternative money scripts and alternative actions that will help you get to where you want to be.
Committing to your goals
Understanding financial biases and recognising which ones affect you can help you stay committed to your goals. Whether your aim is to get better at saving, sticking to your budget, tackle impulse spending, or all of the above, you can use several tools to close the gap between your intentions and your actions.
- The Pay Yourself First Principle – when you get paid, put money into your savings as a reward for your hard work. Do this before paying your bills and outgoings. By doing this, you are thinking of your future and setting up a change in your financial circumstances.
- Slow down decision-making – instead of impulse buying, wait for 24 hours and see if you still feel like you need to buy the item
- Commitment mechanisms that reduce stress and keep you on track e.g. Christmas Savings Accounts
- Practice ‘sweeping‘ – after your outgoings have been paid and you have put money into your savings, sweep your disposable income into another account. Doing this makes that extra money harder to spend as you really have to think if it’s worth moving it into your main account. This ultimately gives you more control over your finances.
Money Gym Masterclass
In June we were joined by Dr Sallyanne for our Money Gym Masterclass. She went into detail and gave her expertise on the link between your mind and your money. Watch the recording of the session for more on this topic.Watch here