Welcome to our new series about your brain on money. Many of us don’t think about how our relationship with money affects the way we think and behave. In our new series on this topic we are going to learn about why we handle money the way we do. Part one is How to save money by understanding why you spend.
How to save money by understanding why you spend
Have you ever thought that your relationship with money is like riding a wild horse? If you don’t tame your emotions about money, you’ll lose control. Research shows that our spending habits are much more motivated by our emotions than we think. By understanding how our mindset toward money drives our actions, we can improve our spending habits and learn how to save money and get out of debt.
Understand what drives you to spend (or save) money to help you manage it better
Over in the U.K., researchers at the BBC Lab UK asked people a set of questions related to their spending habits. The Big Money Test was one of the largest ever studies into the psychology of money and showed that people react in completely different ways: some hoard it, some reward themselves with it, while others base their feelings of self-worth and self-esteem on it. This has a ripple effect on how people manage their money.
Ultimately, the researchers found that people have one (or more) of four main motivations when it comes to money.
See if you recognize what drives your relationship with money from the four types below, and learn what you can do to counter any bad spending habits that have formed along the way.
Are most of your money habits driven by one of these four motivations?
1. Motivation: Security
If you use money to feel safe, you are a Secure Saver.
The risk is… you might forget to enjoy your money along the way.
The solution is… to check your finances to make sure you are covering your bills, paying down debt and saving for a rainy day, but don’t forget to also set aside some money for purchases that you might be reluctant to spend on.
2. Motivation: Power
If you use money to get noticed and impress others, you are a Status Spender.
The risk is… you might spend beyond your means, and rack up debt.
The solution is… to prevent overspending before you land in debt. Try to set up an automatic savings account to put aside 5% to 10% of your paycheque, and restrict spending to what’s left over after paying necessary monthly expenses such as food, rent and bills.
3. Motivation: Love
If you use money to show and buy affection, you are a Generous Indulger.
The risk is… your generosity can get you into debt.
The solution is… to put the brakes on spending. Find free or cheaper ways to show you care, like entertaining at home or helping out with babysitting or another service.
4. Motivation: Freedom
If you use a lot of your money on weekends away or hobbies, you are an
The risk is… enjoying your money can leave you without money for unforeseen expenses and retirement.
The solution is… to have a conscious plan to force yourself to save. Automate your savings for retirement or debt payments, open a tax-free savings account for emergencies, and spend only what remains.
Everyone has a unique relationship with money and knowing what drives it can be invaluable in changing spending habits, learning how to get out of debt and how to save money.