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Author: Greater Bank

The psychology of money: How to develop a healthy relationship with money

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For most of us, dealing with money comes with at least some sort of anxiety or negative emotion. We might be envious of those with more money, we might hold onto our money so tightly it hurts us to spend it, or we might spend money impulsively and feel guilty about it afterwards. 

The psychology of money management is very important to our mental health as well as our physical health. That’s why it’s a good idea to take stock of your personal situation and take steps to ensure money isn’t having a harmful impact on your life. 

The purpose of this article is to arm you with information and practical tools to help you make good money management decisions in the future. 

Money and your health

We can attach strong negative emotions to our use of money, whether we are saving it or spending it. Research has shown that people who experience some form of money stress also experience poor health effects, as well as other personal issues. 

The most common negative emotions we feel about money are fear, anxiety, shame, guilt, and envy. For example, we might be afraid of not having enough to pay for the things we want or need; we might feel anxious about owing money (i.e. mortgages and other loans); we might feel guilty or shameful of spending money excessively; or we might just feel envious about the money other people have.

When these emotions build up, they can have real effects on our physical health, as well other aspects of our lives. Excessive negative emotions caused by money can affect things such as:

  • Immune function
  • Sleep quality
  • Performance at work
  • Relationships with family, friends, and partners
  • Risk-taking behaviour (for example, alcohol consumption)

In order to avoid and deal with these negative effects, it’s important to take stock of our own personal relationship with money.

Money and your personality

We develop particular tendencies in the way we handle our money based on a number of factors. These can include:

  • Our upbringing 
  • Our cultural background
  • Our past experiences
  • Our future aspirations
  • Our genetic psychology

For any individual, all these factors will be different. That’s why it’s important to analyse our relationship with money on an individual basis. If we understand why and how our money habits have developed the way they have, we have a much better chance of changing them for the better. 

For some people, their personal background will mean they are so anxious about saving that they never feel comfortable spending money, even if it’s reasonable or necessary. For other people, they will spend money as a way of releasing negative emotions like boredom or unhappiness. 

To help identify some practical steps you can take in your relationship with money, we have divided the issue up between the psychology of spending and the psychology of saving. 

Psychology of spending

We spend money for two main reasons: out of necessity, and out of enjoyment. If you have a healthy relationship with money, you have a clear idea of when you are spending it for one reason or the other. Not only that, but you also spend money in each way in reasonable proportions. 

The psychology of spending money tells us that, when we buy things, we often get a hit of endorphins. This can be dangerous because it can blind us from analysing exactly why we are spending the money. For example, we may convince ourselves that we need to spend the money, or that we are making a good investment.

A common problem that people have with spending is that they make impulse purchases as a way to release psychological tension. Often unconsciously, we buy things in order to feel a little bit better for a short period. | Greater Bank

If this describes your mindset, you should take the time to look at your spending habits and how they relate to your mood. You can often link up particular habits with certain stressors. For example, you might make impulsive buys on the internet after you get home from a stressful day at work. 

This can be a much larger problem when making more important financial decisions, such as buying a car. But, by practising self-awareness of your spending habits on a regular basis, you can build up psychological resistance to the impulse to spend.

On top of being self-aware, you can take practical steps to moderate your spending through managing your finances. A good place to start is by giving yourself a budget. This will put an initial limit on what you allow yourself to spend. 

But you can add to this by setting yourself a savings goal to work towards. This will give you a sense of purpose in managing your finances. Not only that, but you can reverse the emotional trend of feeling down about spending: when you make deposits and see your savings grow, you will get emotional gratification. 

Psychology of saving

Much like the psychology of spending, the psychology of saving money is all about proportionality. Saving money is a good thing to do, but not at the expense of your mental wellbeing. You should feel comfortable rewarding yourself for saving money by using some of it to spend in ways that you enjoy. 

It is not uncommon for people to feel strong negative emotions about spending money on things that they could be enjoying. For example, you may avoid doing things like going out to dinner with friends or allowing yourself to travel. 

If we feel bad about spending money on these things, it is often because we are afraid. We fear not having enough money in the future to spend on both the things we need and want. Being too worried about saving money becomes unhealthy if you can no longer derive enjoyment from spending it in reasonable ways in the present. 

A useful way to counteract this is to establish a minimum safety net of savings that you feel comfortable with. If you know that you are staying above this minimum level, you can feel safe and confident in spending money in the short term. 

Another practical solution is to separate your money into saving and transactional accounts. By allocating money for spending, you might feel a lot more comfortable when you need or want to buy something. You will have already designated the money for spending and so, mentally, it is not money that is being ‘lost’.

So, what does a healthy money relationship look like?

A healthy relationship with money is going to look different depending on your financial situation. But, there are some common themes to any healthy relationship with money:

  • Having a manageable amount of debt 
  • Good practices of budgeting and saving
  • Enjoying your money when you spend it, without guilt, shame, or remorse
  • Establishing a savings base as a safety net