The Hidden Psychology Behind Your Money Habits

Our approach to money is shaped by emotions, beliefs, and patterns in our lives. Our early experiences and everyday environment can have a significant influence on our financial decisions.

These influences don’t appear overnight — they are formed over time. From childhood through early adulthood, the situations we observe and the experiences we go through can gradually shape how we think about money. Understanding these origins can explain why we approach financial choices the way we do today.

Table of contents

• How money habits are formed
• Examples of productive and counterproductive habits
• Behavioural principles that drive habits
• Tips and techniques for building helpful financial habits
• Strategies to break unhelpful money habits

How money habits are formed

Our relationship with money begins early, as we watch our parents or caregivers spend and save money in different ways. These impressions can shape our own behaviour with money later in life.

Some common ways money habits are formed:

• Family influence: If money was always discussed openly, an individual may feel comfortable with financial planning. If it was a source of stress, they may grow cautious or anxious about spending.
• Early experiences: Receiving pocket money, working a part-time job, or managing small expenses can leave lasting impressions. For some, it may encourage careful saving; for others, it may build a habit of quick spending.
• Social environment: Friends, peers and colleagues can create pressure to spend in certain ways, sometimes even beyond our comfort.
• Personal emotions: Emotions like fear or excitement can influence daily financial habits, often without us even realising it.

Also Read: What are money market funds?

Examples of productive and counterproductive habits

Some habits can help us grow financially, while others may pull us back. Here’s a look at both kinds of approaches:

Productive money habits:

• Building saving habits early, even if it is in small amounts.
• Tracking expenses regularly to see where your money goes.
• Keeping aside money for emergencies.
• Taking time to learn before investing, instead of following trends.

Counterproductive money habits:

• Using credit impulsively for things we cannot afford.
• Ignoring bills or delaying repayments.
• Chasing quick potential returns without understanding the risks.
• Spending to match others’ lifestyles, even when it strains our budget.

Behavioural principles that drive habits

Psychology plays a powerful role in shaping financial habits. Some common behavioural patterns include:

• Instant gratification: The human mind tends to prefer immediate pleasure (like shopping online) over long-term benefits (like saving).
• Loss aversion: We often fear losing money more than we value gains, which can stop us from making balanced investment choices.
• Anchoring: The first price or number we see can heavily influence our subsequent decisions.
• Herd behaviour: When everyone around us invests in something, we may do the same without assessing if it may suit our goals.
• Habit loops: A trigger (such as payday), followed by a routine (shopping), and a reward (feeling happy) can form strong patterns that repeat over time.

Tips and techniques for building helpful financial habits

Building saving habits takes patience. Small and consistent steps can be easier to maintain than drastic changes. You could try the following tips and techniques:

• Start small: Save a fixed, manageable amount each month before spending.
• Automate savings: Set up automatic transfers so that saving happens without much effort.
• Track daily financial habits: Note every expense for a few weeks to uncover unnecessary expenses and spending patterns.
• Set short goals: Work towards small milestones like creating a festival budget or repaying a small debt.
• Reward progress: Acknowledge progress with a simple, non-financial reward or gesture

Strategies to break unhelpful money habits

Breaking habits can be harder than forming them, but it is possible with consistent effort.

• Identify triggers: Take note of any specific moods or situations that can lead to overspending.
• Replace, don’t remove: Instead of trying to stop a habit suddenly, replace it with a healthier action, such as setting aside money in a savings jar when you feel tempted to shop.
• Delay purchases: If it’s a non-essential purchase, wait at least 24 hours before buying.
• Seek accountability: Share your goals with a trusted friend or family member who can encourage you.
• Learn continuously: Read resources that explain finance basics. Knowledge can often reduce impulsive actions.

Also Read: Understand Benefits and Investment Risks of Money Market Funds

Conclusion

Money habits are shaped by our environment, emotions, and repeated behaviour. Some habits, like building saving habits and tracking expenses, can improve financial wellbeing. Others, like impulsive spending or ignoring bills, can create financial stress or make money management harder. By paying attention to our daily financial habits and understanding the psychology behind them, we can slowly replace counterproductive patterns with constructive financial habits.

To summarise:

• Habits may come from early experiences and everyday emotions.
• Constructive habits include saving, planning, and learning.
• Unhelpful habits often involve impulsive spending and ignoring risks.
• Psychological principles like instant gratification and herd behaviour can play a significant role.
• Small, consistent steps can be key to building constructive habits.
• Replacing and managing triggers can help break unhelpful money habits.

At Bajaj Finserv AMC, we recognise that emotions are the cornerstone of investor behaviour – not just for investors but for investment professionals too. That’s why, behavioural finance is at the heart of our investment philosophy, InQuBe, which combines the Information Edge, Quantitative Edge and Behavioural Edge. By understanding, tracking and monitoring market sentiments and our own investment biases, we seek to make mindful and strategic investment decisions. Get the Behavioural edge by investing with Bajaj Finserv AMC. Read more about InQuBe here.

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