Common financial biases, and a grand syndrome, could be holding you back from developing a successful “money mentality.” But you can move on once you know what they are and how to deal with them.
For most of us – and for better or worse – our financial education begins long before our first savings account or credit card. In fact, at age 3 we can grasp money concepts, and by age 7 we have money habits. And certainly, no research study is needed to tell us that by the time we are fully formed adults, these behaviors are much harder to change.
Maybe that’s not a problem for the type of person who is considered “good with money” – basically, someone who knows how to create and grow wealth. But for those on the opposite end of the spectrum, an unproductive “money mentality” can lead to professional and personal struggles.
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This mindset develops over the years, takes many forms, and even the negative behaviors that influence it can be well-intentioned or even misguided.
Changing the attitude to one that positions you for success starts with recognizing the inherent biases of money, then creating a plan to move forward with new behaviors.
Most people have at least one bias that interferes with financial decisions
The vast majority of Americans have at least one monetary bias (opens in a new tab) – an ingrained, but ultimately limiting behavior – that interferes with their financial decision-making.
Here are some of the most common biases:
- Bias present. Those of us with this bias tend to live in the present, which means we prioritize immediate rewards over long-term goals that can provide greater returns. Think of it as a “keep up with the Joneses” mentality — and it’s only been exacerbated in today’s social media era. For example, a lavish vacation or an unnecessary home project probably feels better and provides more instant gratification than putting money into a 401(k) or paying off debt. However, the latter goals are certainly better for the financial health of a person or a family.
- Negligence of base rate. Investors often assess probabilities incorrectly. If someone sees the market going up, they have an impulse to believe that it will always go up – and the same thinking applies when the market is contracting. Market trends particularly imprint themselves on people who are taking their first steps in investing. Many Millennials entered the workforce and started investing just as the 2008 recession was reaching its peak, making the market look like it was still on the brink of collapse and perhaps making them resistant to the risk. Experienced investors can also fall prey to this bias.
- Loss aversion. The feeling of simply winning is not as powerful as the feeling of losing. When we walk past a store or receive an email from a retailer that says in big bold print, LAST DAYS OF OUR BIGGEST SALE OF THE YEAR, we are more likely to enter or click and then buy something useless. On the other hand, fear of losing money can cause investors to miss a major opportunity or sell at the wrong time.
- Mental accounting. Often people make financial decisions based on source. A work income every two weeks? A portion goes to the 401(k). A 20 dollar note found in an old pair of jeans? It’s time to splurge on ice cream. These are small-scale examples, but thinking a little bigger, this behavior partly explains why around 70% of lottery winners go bankrupt. (opens in a new tab) a few years from now.
Not all of our barriers to a healthy financial mindset are necessarily biases, but they’re also worth a longer discussion here — and troubleshooting.
Don’t Ignore Imposter Syndrome, Either
“Imposter Syndrome” is a common phrase among professionals, but its origins go back decades. First coined in 1978 following a study of successful women in the workplace, researchers found that many subjects felt inadequate or undeserving of the rewards of their success – or rather, they felt like imposters.
Today, we recognize that impostor syndrome is hardly limited by gender, yet its effects are harmful to mental health. and financial health. High levels of anxiety, stress, and depression negatively affect decision-making and prevent people from taking risks that may be necessary to achieve a monetary goal or prevent them from asking for a deserved raise.
Overcoming impostor syndrome is not always easy, and internal issues often require external help, such as mentoring, professional coaching, or traditional therapy. However, here are some basic tips that someone can manage on their own:
- Recognize that you are not alone. There’s strength in numbers, and while it varies depending on how it’s measured, up to 82% of the population suffers from impostor syndrome, according to a 2020 study (opens in a new tab).
- Track wins. Accomplishments don’t lie. Reviewing – and documenting – career highlights can serve as a reminder that someone belongs in their position.
- Recognize natural talents. Very few of us are experts at everything, but most of us have abilities that come naturally and help us grow personally and professionally.
Create an Abundance Mindset
Another way to describe a successful money mindset is an “abundance mindset,” which allows an individual to see more opportunities, options, and resources. It’s the opposite of the “scarcity mentality,” the belief that there aren’t enough of these things, that holds many of us back.
Going from second to first isn’t as simple as telling someone to embrace the power of positive thinking. Changing beliefs is difficult, but it is not impossible. For many, it’s a series of small steps that eventually become a big leap:
- Set a goal/challenge. Go big. Pay off the student loan that’s been a monthly drain on the checking account, or finally decide to hit the gym four days a week for a year.
- Make a plan. Big goals won’t be achieved overnight, so brainstorm solutions. That student loan? How about adding an extra $100 to the monthly payment? The gym campaign? Ask a friend to join you for extra support and motivation.
- Recognize strengths and weaknesses. Like the note above on recognizing natural talents, it helps to know, in particular, where we are not strong. While we can always hone our skills and improve, surrounding ourselves with people who balance out our weakness will create a more cohesive support system.
- Replace “but” with “and”. It’s no longer about “I would like to take this two week vacation abroad, but I can’t afford it”. People with an abundance mentality say, “I’d like to take this vacation, and here’s how I’m going to do it.”
Recognizing money biases, eliminating impostor syndrome, and developing an abundance mindset are all part of developing a successful money mindset — not the ultimate solution. However, these actions highlight that much of growing wealth is based on self-reflection, rather than external influences.
Indeed, our success is in our hands.
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