With the credit crunch looking to last much longer than originally projected, many individuals are scratching their heads as to how it all happened. If news reports and newspapers are correct, then how could so many people – banks and lenders included – be so irresponsible with their money to the point where we’re all in this grave financial condition?
Turns out, there’s a certain psychology when it comes to money, and it doesn’t exactly paint a pretty picture of human nature. In fact, financial psychology is a rising field, with more students and professionals opting to study the psychology behind Wall Street and how it affects how we handle our money.
So when it comes to money and our spending habits, why do we do the things that we do?
Many psychologists believe that in Western cultures, people spend more money on frivolous purchases because they think that they deserve it. In cultures where economic class is still prevalent, certain consumers want to achieve a certain lifestyle – and credit cards make that desire all too easy to achieve. Additionally, consumers are adept at justifying extravagant purchases, all of which are rooted deep in psychology. From post-breakup retail therapy to show-off car purchases, what we buy is influenced by the impression that we want to give – and that, according to financial experts, is the quickest road towards debt.
On the other hand, many consumers are "wishful" spenders: they may justify making big purchases on credit cards because they’ll believe that they’ll have the money to pay for it later down the line. Students are especially prone to this behavior, especially when on the verge of graduation; thoughts of a high-paying job after uni will lead to irresponsible purchases, which quickly catch up to them when their entry-level jobs can’t finance the lifestyle they once led.
Credit card bills play upon consumer psychology, especially in the form of minimum payments. Since many consumers don’t look at the bigger picture, they can often overlook the fact that if they don’t pay more than the minimum payment, they’ll be paying off their credit cards for the rest of their lives. Looking at debt in the bigger picture can often lead to feelings of hopelessness – so instead of acting against that debt, many individuals look at debt as an inevitable part of living in the modern world.
Of course, there’s the "Keeping Up With The Joneses" mentality, which is extremely prevalent in Western cultures. We’re mentally programmed to want things of equal or greater value than our neighbors, even if that neighbor is a doctor and we’re administrative assistants. A person’s value can still be perceived through appearance – hence, the desire to appear as “valuable” as possible.
Understanding the psychology of money can go a long way in helping you to understand your own spending habits – and once you’ve put your finger on how you act with your money, you can put the brakes on your unhealthy financial habits once and for all!
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