Could my way of thinking be sabotaging my bank balance?
4 min | 8 August 2022
Rising prices are causing many of us to feel the pinch. But ingrained ways of thinking about money mean we could also be making poor decisions with the funds we have.
Lesley Thomas, a money coach at the Money Confidence Academy (Opens in new window), says that these ways of thinking, or mindsets, can affect our whole lives. "Our money mindset doesn't just relate to how much money we have in our bank account. It relates to everything that we do – in terms of how we plan our lives, set our goals, and the actions we take," she says.
By realising how the way we think affects our money management, we can make better decisions – and feel richer for it.
When do we form our attitudes to money?
"Our attitudes to money are set before we are seven years old", says money mentor Elizabeth Buko, who runs Wealth From Little (Opens in new window) And they don't always reflect our reality in later life.
"Our money beliefs are formed based on incomplete or false information that we were exposed to at a young age from our parents," she says, adding that many of us either have a mindset of "scarcity" or "abundance" – thinking you'll always or never have enough.
While some people may have more money discipline than others, Thomas says a poor mindset can cause self-sabotaging behaviours, often out of guilt. Examples, she says, include buying something you can’t afford, putting it on a credit card, then being struck by buyer's remorse.
Some people are too generous, leaving themselves without enough money because they pay for everyone else's drinks or cabs home after a night out.
Steps to help improve your money mindset
- Identify your beliefs – think about how you feel when you have money left over a night out, when you look at your last 10 transactions or pay for a holiday with savings, for example
- Challenge beliefs that are not working for you by adopting new ones
- Become aware of when and how you fall back on old money habits
- Depending on the habit you're trying to re-set, create spending or saving goals. Then post your targets somewhere noticeable, like your fridge or calendar, to remind you why you want to achieve your goal (like saving up to buy a house, pay off a debt or start a business)
If you’re feeling overwhelmed about how to start, Sarah Negus (Opens in new window), author and business coach, suggests that writing down all the things you believe about money can help you challenge them. "Decide when you learned these things. Are they your real beliefs?" she says.
By reframing situations in the past that have felt unfair, she says, you can remove the power that money has over you.
Being aware of common thinking patterns about money can also help you to think critically about saving and spending, and help make better choices.
Dr Nethal Hashim from Bayes Business School, whose research has looked into how we save and spend, says that being aware of a phenomenon called "hyperbolic discounting" can help us better manage our cash.
Hyperbolic discounting is when a person disproportionately discounts the future benefits of saving money in favour of instant gratification. Knowing your mind will do this can help motivate you to save, not spend.
Other common thinking patterns that could affect your spending include:
- Loss aversion: where we fear losing money twice as much as we love to gain it, causing us to be too cautious with our finances
- Anchoring: where we fixate on a reference point such as the former price paid for something when deciding whether it is worth buying, even though the old price isn't relevant to our decision
- Herd behaviour: where we want to do something with our money because other people are
When you make a financial decision, ask yourself how it fits with your money mindset and check yourself against these thinking patterns. This can help you to make decisions grounded in your financial needs, rather than in your financial past.