Money Personalities
People with money fall in one of 4 categories based on how they use the money
- Spender:
- Spending most of the money with little regard to future.
- One interesting note is that the Non thinker(A person who doesn’t want to think about money) tends to be quite closely related to this
- A Useful advice for spenders is to set aside some amount before anything.
Part of all your earn is yours to keep
- Saver:
- Prioritizes the saving of money before all else.
- Learning to spend money is often also a important skill, which sorta gets missed here. as well as living life a little.
- Investor:
- Willing to take a little risk with their money with the hopes of making it grow.
- Balancer:
- A mix of the 3.
Personal Note
I probably fall in the category of Saver. Would love to learn how to invest a little in the future i think.
Psychology of Money
Several psychological biases influence our spending decisions. Being aware of these can help us use money more smartly.
Herd Mentality
The tendency of making financial decisions based on others, without any personal research. There are two ways this can happen
- Everyone is putting money here, it must be good, or else i will miss out.
- Everyone is buying this, I think I need it too. Following the herd tends to free us from thinking about the money is being used, which can often lead to bad financial decisions.
I think this is even more important in this era where marketing departments are happy to manufacture wants
Loss Aversion
The fear of a loss affects us much more compared to the joy of a win. This can very often lead us to missing opportunities because of the associated risk.
Endowment Effect
We value things more highly simply because we own them, regardless of their actual value. This often results in us holding on to things we don’t need or having difficult selling things
Anchor Bias
Being fixated on the first piece of information. Shops often abuse this, with
- First pricing something at a higher price
- Then offering a lower price signalling it as a discount. Think of shops always being on discount, or salesperson saving this is a special deal for you. We can often get tunnel visioned into thinking that the price we got offered is a good deal. This could lead us making a financial decision without thinking of the greater picture or that if something is truly worth the cost.
Present Bias
Focusing more on the present when judging some action’s value. This can often lead to us undercutting the future potential. For example: choosing to spend some extra cash on something you want now, compared to saving it for future needs or emergencies.
Societal Views
Depending on what the society or a group considers a “normal” behavior can affect our financial decisions. We can be socially completed to make decisions that might not be in our financial best interest.
Personal Take: Coming from the Indian sub-continent there is this much social pressure of having a grand marriage. Investing a lot of money on this very special day. At the same time, the stories of people taking on loans or investing their entire life savings for this are also quite common.
from khan academy’s financial literacy course