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The Psychology of Financial Planning – Explained

Personal financial planning isn’t just about math and spreadsheets. Understanding your own financial psychology can help you manage money behaviors and bring you even greater satisfaction.

What is Financial Psychology? 

Psychology is the study of mind and behavior. It encompasses everything from how your brain works to how this translates into your beliefs and the actions you take.

The field of financial psychology applies this specifically to your attitudes and beliefs about money and how it affects your financial decisions. Everything from how much you save (or whether you even do) to the type of car you buy or how you feel about your income is all an outflow of your financial psychology. 

It involves more than just the inner workings of your brain too. Financial psychology is a function of emotional, social, and even cultural influences. 

Understanding your financial psychology can help you in many ways. 

  • When you understand why you hold certain views on money, you can identify your values and establish goals that set you up for joy.
  • Getting a solid grasp of your financial psychology can also help you create the best plan for reaching your goals. Financial planners often talk about crafting “custom financial plans,” but to do so effectively, you need to understand what drives you… it isn’t all about the numbers. 

How Does Psychology Impact Your Finances? 

Financial psychology offers several tools for understanding how we think, feel, and behave regarding money. One of the most popular is money scripts. These are unconscious views about money and its role in our lives. They are typically formed in our adolescent years but carry over into adulthood.

Money Scripts 

Dr. Brad Klontz is one of the leading academics in the field of financial psychology and has written extensively about money scripts and their influence on our behavior.

In general, he outlines four main financial psychology topics to be on the lookout for:

  • Money Worship
    • Money worship is on the opposite end of the spectrum from money avoidance. Scripts in this category include a belief that money will make you happier, can solve your problems, or provide stability.
    • Money worship scripts are also more prominent in people with lower income, education, and wealth. They portray many of the same behaviors as those with money avoidance scripts.
  • Money Status 
    • Money status scripts relate wealth to worth—the more money you have, the better you are. They frame success in terms of money. People with money status scripts will often spend their money on status symbols such as nice cars, upscale homes, and the latest technology.
  • Money Vigilance
    • Being very closed about your income and wealth and having a strong drive to save are characteristics of money vigilance scripts. They are protective in nature, and someone who is “money vigilant” is less likely to spend frivolously or gamble. 
    • While money vigilance is the least negative category of the four, it can also go too far. A downside to money vigilance is that it may cause you to prioritize finances over living a happy and fulfilling life. 

Money Conflict

Money can also be a source of conflict between spouses and family members, especially between those who don’t have the same views on money or have values that aren’t in sync.

Addressing these differences in how individuals think about money can help avoid potential conflicts. That’s another reason why it’s important to intentionally include financial psychology in your financial plan. 

For instance, a money avoider and someone with a strong money status script would each want different outcomes. If these two people were married, it would be challenging to implement an effective financial plan without discussing those differences and helping them each see the other’s perspective. 

Opening that conversation could help them find opportunities to compromise and navigate the inherent challenges of planning for competing scripts.

How Does Your Financial Psychology Affect Your Plan?

If you haven’t yet, take some time to explore how your own personal financial psychology is positively or negatively impacting your life. Need help? We’d be happy to act as a sounding board! Reach out to us today by clicking here.