Explore how your beliefs and emotions impact your financial decisions and how to fix them.
Have you ever wondered why some people seem too good in money matters or have a Midas touch when investing while others are too bad at managing money and constantly struggle to make ends meet?
Why does this happen? Is it that one person is lucky enough and the other is not?
Well, that’s not the case because financial success is not a matter of luck. But, it is the reaction of financial decisions you make over time.
The beliefs you have in mind and how your emotions trigger them play a critical role in shaping your financial behaviour. This can ultimately make or break your success in managing money.
After all, understanding the inner workings of your mind and the actions you take can help you master the art of money management.
So let’s follow the money trail and see how you can master the art of the Psychology of Money!
What is the Psychology of Money?
The psychology of money refers to how our thoughts, beliefs and emotions influence our financial decisions, particularly when investing. It’s not just about knowing the numbers and trends in the market but also understanding how our minds work when it comes to money.
For example, you might have heard of herd mentality. It’s a situation when many investors follow the crowd and make investment decisions based on what others are doing rather than doing their research.
Another example is loss aversion, which is the tendency to feel the grief of a loss-making investment more than the happiness of gains. This might cause an investor to hold onto losing investment for the long term with the hope of a profit in the future.
You might have also encountered someone who gets greedy after seeing profits in their Demat account. Such investors hold on to their investments, hoping for even more profits. Sometimes this works out for them, but other times it doesn’t.
By recognising such psychological biases that you might be subconscious, you can make more informed choices and ultimately achieve greater financial success.
How Can You Analyse and Improve Your Psychology of Money?
You need to first start with understanding your beliefs, emotions and common behaviours that you see while taking money-related decisions. Accordingly, you will identify any biases or negative patterns impacting your financial decisions.
Here are the steps you can take:
Understand How You Take Decisions on Money Matters
Every month we take so many important decisions regarding money, not just about wisely investing your money but also about spending. Sit back and reflect on how you handle these decisions. For example, many believe that money is always easy to come by and that they don’t need to worry too much about saving or investing. Hence, they overspend on unnecessary things without thinking about difficult times.
By reflecting on your behaviour with money, you can challenge your beliefs and make more informed decisions.
That brings us to our next step.
Identify Your Financial Goals
After analysing and challenging your thoughts and beliefs about managing money, you may set financial goals for yourself and create a budget. This will ensure that you are spending and saving money in a way that aligns with your values and aspirations and will also help you stay focused and avoid making impulsive decisions based on emotions or short-term thinking.
Investing Based on Your Risk Appetite
Experts often suggest that you must invest in staying in your comfort zone. But, most individuals don’t know what their comfort zone is. Are they comfortable with high-risk investments, or are risk-averse investors?
The answer lies in examining your past investment decisions and the behavioural outcomes. For example, if you feel sweaty palms and fear when you see your principal amount depleting, you might not be a high-risk investor. Whereas some investors are seasoned enough that even after looking at losses, they have strategies and plans to cut off loss-making investments and switch to profitable ones. Such investors are high-risk takers.
So, you must understand your comfort level with risk and invest accordingly.
By taking these steps and being mindful of your psychology of money, you can make more informed and effective financial decisions and achieve greater financial success over the long term.
Remember, understanding your beliefs and emotions around money is as important as understanding the trends in the market.