So why did you buy that car despite the extra burden it places on your monthly expenses? Why did you not go on that well-deserved overseas holiday when you can clearly afford it? It all comes down to the psychology of spending money, a fascinating process that influences whether you swipe or save.
Here’s the bottom line: What led you to a seemingly automatic or logical decision had been formulated for years within you – based on factors such as your mindset, emotions, history with money and personal values built over time.
Growing up, for example, money could have been a more easily accessible part of life. On the other hand, it could have been a resource as scarce as a day without loadshedding. The psychology of spending money is undeniably shaped by these backgrounds – scarcity or abundance. Even all grown up, with the picture flipped, your original mindset will play a part in choosing between those shoes or that savings plan. Ultimately, when people feel they are in a state of scarcity, they tend to adopt a scarcity mindset, where they are more focused on conserving their resources and avoiding waste. They prioritise necessities over non-essentials and may be more cautious about spending money. On the other hand, when people feel that they have an abundance of resources, they are more likely to adopt an abundance mindset and may be more likely to spend money on things that bring them joy and satisfaction.
The heart of the matter
Like Valentine’s Day, for some it’s a time when the heart soars and for others it can be a bit of a heart sore. Fundamentally emotion plays a significant role in your spending decisions. We may spend money on things that make us happy or avoid spending money on things that evoke fear or sadness. Of course, logical factors, such as budget, current expenses, and future financial goals, are also at the heart of our decision-making.
What kind of money manager are you?
I’ve broken down a general framework for understanding different approaches to spending and financial decision-making – archetypes. This includes The Hoarder, The Spender, The Investor, The Gambler, and The Avoider. These archetypes are not absolute, you may exhibit traits from multiple archetypes and your approach may change over time based on your personal circumstances and experiences. It’s interesting however to see which archetype you fall into right now:
The Hoarder
The Hoarder prioritises saving money and building wealth over spending. They are typically cautious about spending and prefer to live below their means. They may also have long-term financial goals, such as saving for retirement or paying off debt.
The Spender
The Spender prefers spending money over saving. They enjoy the process of shopping and buying things and may be more impulsive in their spending decisions. They may also struggle with managing their finances and controlling their spending habits.
The Investor
The Investor focuses on growing their wealth over time and may have a strong understanding of the financial markets. They may also have a longer-term perspective on their finances and make decisions with a view to their future financial security.
The Gambler
The Gambler is more likely to make quick and impulsive spending decisions without much thought or consideration. They may struggle with managing their finances and can often make purchases they later regret.
The Avoider
The Avoider seeks refuge in finding good deals and discounts and is often skilled at stretching their budget. They may be cautious about spending but enjoy the process of finding a great bargain.
Recognise yourself? Whether you do or not, understanding personal finance and developing a growth mindset can play a critical role in building wealth. Recognising your patterns and triggers can make all the difference as you decide the best financial journey for you at every life stage.
Are you on the right path to financial freedom? A free coaching session by a money management expert might guide you in a direction that puts you more fully in control of where you want to be.