What drives your financial decisions?

Do you want to become smarter in handling your money? Do you want to build wealth and retire at a younger age?

The first step to changing or fixing your bad money habits is by first knowing the biggest motivators in your financial life. Unknown to most of us, there are many financial drivers that impact how we spend our hard-earned money. By learning more about them, we can establish a good relationship with money and make smarter and better financial decisions in life. In this article, you’ll find out the many things that can affect your decisions and how you can learn to control them to create a healthy mindset about money.

Your Personality

Financial psychology is an often overlooked money concept that has yet to find its place in our daily conversations. This discipline, which is a combination of psychology and behavioral economics, studies the way we as consumers use our money. It studies how our innate behaviors affect our financial decisions and how we can learn to understand it.

According to psychologists, people can be categorized into different “financial personality types”. These personalities can shed light on their inner motivations and current relationship with money. From anxious investors and hoarders to cash splashers and “ostriches” defined as “someone who would rather bury their head in the sand than organize their finances”, learning more about your personality can give you insight on your underlying desires and mindset about money.

Survival

The most common driver of financial decisions is, of course, our need for survival. Survival is an innate human desire and everyone has this instinct—only with varying levels. This can be shown in simple behaviors such as prioritizing money for food instead of leisure. It can also be seen in people who would work two jobs or find additional income streams in order to keep the cash flowing. Another example would be a small business that struggles to get funds that might operate and base its decisions based on survival. According to statistics, 70% of small businesses fail within the first five years of starting their business—this gives business owners a 30% survival chance of succeeding.

Status

Another big financial decision driver is our desire to impress other people. Sadly, we live in a world where status has become a very important part of our being. We measure our self-worth based on how much money we make and how much money we actually have in the bank.

This can be very destructive behavior. The more we try to impress others by buying things we couldn’t afford, our debt grows larger and more difficult to pay. Most people who have this financial mindset are also the most terrible at making money decisions.

Financial Literacy

The more knowledgeable you are about money, the more financially successful you will be. Financial literacy is another important factor that affects our financial decisions. The rich stay rich because they have enough financial literacy to take good care of their wealth. The poor stay poor because they are financially illiterate. But there’s also a more serious and a bit concerning problem at hand.

Financial literacy is a bigger issue today than in the past years. Times are changing and the way we shop and use the money for our daily purchases is so different from the past generation. It has been found that more and more younger people today don’t possess the basic financial literacy skills they need in life.

As it turns out, most of us are bad at managing money. This is also the reason why we tend to accumulate debt fast and have no solid savings. A person who has no understanding of proper budgeting, investing, and proper wealth management can make really bad financial decisions throughout the course of his life.

Quality of Life 

What is a good life for you? For some people it’s about owning a lot of material wealth, for others it’s about rich life experiences. Quality of life is a subjective measure of happiness that is an important factor in how we base our financial decisions.

Now, there are many things that can affect your own definition of quality of life. Some of the most common include financial security, job satisfaction, health, and family. Spending decisions based on the quality of life you want is very much seen today in the age of social media. People spend money on the things they value most in life. These things are also the things they show off and put in their social media feeds. It could be a job promotion, a new car or house—things you value and put meaning to your life.

If you’re someone who believes happiness can be found in a purposeful career and job, then you’ll probably invest your money more in building a business or in moving to a better city for work opportunities. On the contrary, if you’re someone who believes happiness is about good health and better relationships, you’ll find yourself spending your money more on healthcare and family.

Greed and Fear

Greed and fear are both emotions that can impact your financial decisions. Fear is characterized by a distressing emotion induced by a perceived threat while greed is the excessive desire to possess wealth. Fear can impact your financial decisions by the so-called “fear of missing out”—this mindset is a notorious culprit for increasing debt and bankruptcy. The fear of not fitting in ex: everyone owns this, we should have one too. Greed can put you on the mindset of scarcity all the time. You desire everything and this consumes you to the point that you take extra measures to keep or earn money—in whatever ways possible.

Conclusion: Making the Most Out of Your Money

Finding out what drives your decisions regarding wealth and money is the first important step to changing your mindset about money. So before you make your next financial decision, stop and ask yourself what underlying reason is guiding you for this next move? Honestly evaluate your choice. Are you making this decision smartly or are you simply doing this to impress your neighbor?