The Psychology of Spending – Understanding Your Money Mindset

From buying clothes that don’t fit to gambling against the odds, people’s mindsets around money can impact all areas of their financial lives. Here are a few common money mindsets that could be holding you back—plus science-backed tips for changing them.

How do you feel about your finances? According to psychologist Eesha Sharma, Ph.D., director of San Diego State University’s Financial Health and Well-being Lab, your “money mindset” is determined by your answers to that question. And how you relate to and use money — from counting every penny to splurging on $3,000 sneakers — is influenced by those beliefs. “Money mindset affects all areas of life involving money,” Sharma says.

Some mindsets make sense: If you’re living paycheck-to-paycheck, it goes without saying that you’ll need to tighten the belt a bit in retirement. But others can have negative consequences for your bottom line. In this article, we’ll cover three common ones — plus tips for shaking up those beliefs and behaviors.

Fear of Scarcity

A scarcity mindset makes people see money as finite. They pinch pennies and save less than they earn, leading them into debt or undersaving for retirement, Sharma says.

Scarcity also causes people to make bad decisions in the moment. When individuals feel like they don’t have enough resources (which could be anything from time to mental energy), their preference shifts toward immediate pleasure (hedonism) while ignoring future costs of their actions, according to research published in the Journal of Personality and Social Psychology.

Sharma and co-authors Stephanie Tully at the University of Southern California and Xiang Wang at Lingnan University Hong Kong found similar patterns in several experiments with real or perceived scarcity conditions. The researchers found that when people felt financially scarce (or were told they were), they became more concrete in their thinking and took more risks — like not taking protective actions during the COVID-19 pandemic of 2020.

“Scarcity just makes people do things that run against their own self-interest,” Sharma says. “It’s very hard when you’re in a scarcity mindset to be able to think about the future.”

Desire for Instant Gratification

You know you need to save for retirement, but it’s just so fun to buy things now. It’s hard to resist that desire, and even harder to understand what drives it.

Previous research has found that when impulsive people are given the choice between immediate or delayed rewards, they’ll take the instant one faster than patient people will. And in brain-imaging studies, these same quick-choosers show greater activation in regions associated with pleasure and reward.

Gratification today can have long-term consequences for mental health and credit card debt. Understanding why we spend is a key step toward controlling those impulses and striking a balance with spending, Sharma says.

Delayed Reward Discounting

As time progresses, people place less value on future rewards — that $1,000 next week might as well be $900 today. This tendency is called delay discounting and has been linked to poor academic performance and physical health.

In one experiment published this month in Nature Communications Social Science using Instagram followers and likes as rewards (in addition to cash), researchers showed that all three measures of delay discounting (including two self-reported scales) had high correlations with one another, suggesting they reflect trait-like characteristics.

“These three measures of delay discounting are picking up on something important,” Sharma says. “Individuals who were more likely to choose smaller sooner rewards over larger later ones in one context were also more likely to choose smaller sooner rewards over larger later ones in other contexts.” She suggests researchers could now begin studying how these scales relate to other psychological traits or behaviors.

In a related study, Sharma and her colleagues found that the frontal P2 ERP component varied with the size (but not delay) of a reward. Larger amplitudes were associated with greater cognitive control and non-impulsive choices. They also found that adolescents had stronger impulse control — or less self-control — than adults, which could be why they discount future rewards more heavily.

To prioritize safety, there are several things you can do to ensure you’re prepared for any unexpected financial setbacks. For example, many people set aside money in emergency funds, buy insurance policies, save money in the bank, and use budgeting strategies.

Other individuals, however, might make investments at their workplace that reduce costs tied to injuries or deaths. They believe this will help lower the potential impact on the bottom line that these events might have.

Those who prioritize status often spend their money on items that appear successful or wealthy. This can include luxury vacations and products from popular designers. Unfortunately, this view sometimes leads people to use credit cards more frequently than others do.

Understanding your mindset when it comes to money can help you avoid making mistakes and stay on track toward reaching your financial goals. Speaking with trusted friends or advisors about their own beliefs and tendencies is a great way to learn more about your own. Changing your money mindset takes time and hard work — but if you put in the effort and learn from experience along the way, it’s definitely achievable. You could even seek professional assistance if you think there may be an underlying issue like compulsive spending or gambling addiction.

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